If the stock option picks were to trade down in an area between
$80.00 and $82.00 by January 2004 expiration, you would be able
to sell the stock option picks for their exact price at that
time. You would lose a little money from the amount you paid
for the collar and you would also lose a little money from $82.00
down to wherever the stock option picks closed on expiration
day in January 2004.
If the stock option picks
were to trade down below $80.00, you
would be guaranteed a sales price of $80.00 because you own
the 80 strike put. No matter how much lower the stock option
picks went, you would be guaranteed $80.00. Of course, you would
have to deduct the cost of the collar from the sales price,
but that should be minimal. If the stock option picks were to
remain stagnant, you would be able to sell the stock option
picks at the closing price, on expiration day of January 2004.
Your only cost would only be the amount of money you paid for
If the stock option picks were to trade up to a price between
$82.00 and $85.00, you would be able to sell your stock at whatever
price the stock option picks closes at the January expiration
Again, you will have to deduct the amount of money you spent
for your collar but the increase in price would offset this
Finally, if the stock option picks trades up and closes above
$85.00 on expiration day of January 2004, your stock option
picks will be called away from you at $85.00 due to you being
short the $85.00 strike call. So in this scenario your upside
is limited, but at least you have locked in some additional
gains, and avoided the higher short term capital gains taxes.
As you can see, the collar will give you a range of protection
that assures a sales price that is very acceptable, with minimal
risk and room for some further upside appreciation. This also
buys you the necessary time you need to get past that one year
mark and enable you to avoid the higher, long-term capital gains
tax. You would now only have to pay the lower, long term capital
gains tax, which would save you money.
In conclusion, the two tax deferral strategies outlined above
are both excellent ways to save you up to 67% on your annual
tax liability from your medium to long term stock option picks.
Again, you would use these strategies on stock option picks
that you have owned close to one year, and for which you would
like to lock in the current sale price without actually selling
the stock option picks.
In this scenario, a properly initiated options strategy can
save you a considerable amount of money on your taxes.
Again however, please consult your broker, tax attorney, or
accountant to make sure that these strategies are still acceptable
to the IRS. Tax laws do change, and it is your responsibility
to be aware of new laws.