Tax Deferral Strategies For Stock Option Picks

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 the collar.

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 date.

Again, you will have to deduct the amount of money you spent for your collar but the increase in price would offset this expense.

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.