To capitalize on this strategy, your call must meet certain
criteria. First, the time to expiration should be just beyond
the stock’s one year ownership time period. You need to get
beyond the one year period but not too much beyond so you are
not tied into the position longer than you have to be.

Remember, you are engaging in this strategy because you want to
sell the stock and close the position, so you want to stay away
from doing anything that would keep you in the position longer
than absolutely necessary.

Second, you would want to make sure the option is deep enough
in-the-money, in two respects. First, the option must have a
high delta, at least in the 90’s, and second - the strike price
must be lower than what you perceive is the lowest price the
stock could reasonably go between now and the option’s
expiration.

So, you decide to sell the January 2004, 60 strike calls for
$23.00. By doing this, you have ensured yourself of being able
to sell the stock at $60.00 and you have received $23.00 to do
so.

In effect, you have sold your stock at $83.00 without selling
your stock, as long as the stock stays above $60.00 by the
expiration. This is because the buyer of the option will
naturally exercise your short call with the stock above $60.00
forcing you to sell the stock to them. You then sell your stock
at $60.00 plus the $23.00 you received from the sale of the
option.

Because this happens at January expiration, which is after the
one year time line, you now only have to pay long term capital
gains tax - instead of the much higher short term capital gains
tax.

You see what happens when the stock stays above $60.00, but what
happens when the stock trades below $60.00? Below $60.00, the
buyer of your call will not exercise their call. Under those
circumstances, you must sell the stock yourself. You will
realize whatever the market price of the stock is at that time
plus the $23.00 you received from the sale of the call.

Another strategy that would provide you the protection you need,
while buying you the time you need would be a collar. A collar,
however, can cost you money because the collar involves the
trading of two options, and therefore costs you more in
commissions.

We have discussed the collar strategy in your Home Study Guide.
When applying the collar to this situation, make sure you choose
an expiration month that is beyond the one year time period from
the purchase date of your stock. Before you make a final
decision on selling a deep in-the-money call to avoid short term
capital gains tax, make sure you check out the collar and
compare its suitability against the call sale strategy to see
which is better for you.

As you can see from our example above, the sale of a deep
in-the-money call can buy enough time and protection for you to
artificially extend your stock position with minimal risk. If
employed properly, the Tax Deferral Strategy can save you many
thousands of dollars in saved taxes. The next time you have
profits in a long stock position that you’ve had for nine months
or more, consider using this strategy to lock in your profits –
and save money on your taxes.

Note: Be sure to talk to your broker and your accountant about
this strategy before employing it. Tax laws change regularly, as
you can see, and you should check with an expert to make sure
this strategy is still viable. It is important to consult with a
professional accountant or tax attorney before employing any of
these strategies to see which is currently acceptable with the
IRS.

Update: At the time of this writing, we have heard that the IRS
may be changing their policy on this strategy and may consider
this a ‘wash sale.’ This essentially means that the sale of a
call in this manner would constitute a sale of the stock, and
that you would still be liable for the short term capital gains
on the trade. This means. In reality, the IRS is stating that
the stock was effectively sold on the date the call was sold and
not on the expiration date of the call.

If the IRS will not let us use in-the-money options or
at-the-money options for tax deferral, then we must find a way
to use out-of-the money options to lock in the stock price for
the period of time necessary to meet the long term gain
requirement, as in the case of the collar strategy.

As you recall, the collar combines the purchase of an
out-of-the-money put, with the sale of an out-of-the money call.
The proceeds of the call sale will be used to off set the cost
of the put and thus, the total outlay of capital will be
minimal.

Looking back at the earlier example, we will now apply a collar
to protect our position price, and buy us time until the urself of being able
to sell the stock at $60.00 and you have received $23.00 to do
so.

In effect, you have sold your stock at $83.00 without selling
your stock, as long as the stock stays above $60.00 by the
expiration. This is because the buyer of the option will
naturally exercise your short call with the stock above $60.00
forcing you to sell the stock to them. You then sell your stock
at $60.00 plus the $23.00 you received from the sale of the
option.

Because this happens at January expiration, which is after the
one year time line, you now only have to pay long term capital
gains tax - instead of the much higher short term capital gains
tax.

You see what happens when the stock stays above $60.00, but what
happens when the stock trades below $60.00? Below $60.00, the
buyer of your call will not exercise their call. Under those
circumstances, you must sell the stock yourself. You will
realize whatever the market price of the stock is at that time
plus the $23.00 you received from the sale of the call.

Another strategy that would provide you the protection you need,
while buying you the time you need would be a collar. A collar,
however, can cost you money because the collar involves the
trading of two options, and therefore costs you more in
commissions.

We have discussed the collar strategy in your Home Study Guide.
When applying the collar to this situation, make sure you choose
an expiration month that is beyond the one year time period from
the purchase date of your stock. Before you make a final
decision on selling a deep in-the-money call to avoid short term
capital gains tax, make sure you check out the collar and
compare its suitability against the call sale strategy to see
which is better for you.

As you can see from our example above, the sale of a deep
in-the-money call can buy enough time and protection for you to
artificially extend your stock position with minimal risk. If
employed properly, the Tax Deferral Strategy can save you many
thousands of dollars in saved taxes. The next time you have
profits in a long stock position that you’ve had for nine months
or more, consider using this strategy to lock in your profits –
and save money on your taxes.

Note: Be sure to talk to your broker and your accountant about
this strategy before employing it. Tax laws change regularly, as
you can see, and you should check with an expert to make sure
this strategy is still viable. It is important to consult with a
professional accountant or tax attorney before employing any of
these strategies to see which is currently acceptable with the
IRS.

Update: At the time of this writing, we have heard that the IRS
may be changing their policy on this strategy and may consider
this a ‘wash sale.’ This essentially means that the sale of a
call in this manner would constitute a sale of the stock, and
that you would still be liable for the short term capital gains
on the trade. This means. In reality, the IRS is stating that
the stock was effectively sold on the date the call was sold and
not on the expiration date of the call.

If the IRS will not let us use in-the-money options or
at-the-money options for tax deferral, then we must find a way
to use out-of-the money options to lock in the stock price for
the period of time necessary to meet the long term gain
requirement, as in the case of the collar strategy.

As you recall, the collar combines the purchase of an
out-of-the-money put, with the sale of an out-of-the money call.
The proceeds of the call sale will be used to off set the cost
of the put and thus, the total outlay of capital will be
minimal.

Looking back at the earlier example, we will now apply a collar
to protect our position price, and buy us time until therket price of the stock is at that time
plus the $23.00 you received from the sale of the call.

Another strategy that would provide you the protection you need,
while buying you the time you need would be a collar. A collar,
however, can cost you money because the collar involves the
trading of two options, and therefore costs you more in
commissions.

We have discussed the collar strategy in your Home Study Guide.
When applying the collar to this situation, make sure you choose
an expiration month that is beyond the one year time period from
the purchase date of your stock. Before you make a final
decision on selling a deep in-the-money call to avoid short term
capital gains tax, make sure you check out the collar and
compare its suitability against the call sale strategy to see
which is better for you.

As you can see from our example above, the sale of a deep
in-the-money call can buy enough time and protection for you to
artificially extend your stock position with minimal risk. If
employed properly, the Tax Deferral Strategy can save you many
thousands of dollars in saved taxes. The next time you have
profits in a long stock position that you’ve had for nine months
or more, consider using this strategy to lock in your profits –
and save money on your taxes.

Note: Be sure to talk to your broker and your accountant about
this strategy before employing it. Tax laws change regularly, as
you can see, and you should check with an expert to make sure
this strategy is still viable. It is important to consult with a
professional accountant or tax attorney before employing any of
these strategies to see which is currently acceptable with the
IRS.

Update: At the time of this writing, we have heard that the IRS
may be changing their policy on this strategy and may consider
this a ‘wash sale.’ This essentially means that the sale of a
call in this manner would constitute a sale of the stock, and
that you would still be liable for the short term capital gains
on the trade. This means. In reality, the IRS is stating that
the stock was effectively sold on the date the call was sold and
not on the expiration date of the call.

If the IRS will not let us use in-the-money options or
at-the-money options for tax deferral, then we must find a way
to use out-of-the money options to lock in the stock price for
the period of time necessary to meet the long term gain
requirement, as in the case of the collar strategy.

As you recall, the collar combines the purchase of an
out-of-the-money put, with the sale of an out-of-the money call.
The proceeds of the call sale will be used to off set the cost
of the put and thus, the total outlay of capital will be
minimal.

Looking back at the earlier example, we will now apply a collar
to protect our position price, and buy us time until the
artificially extend your stock position with minimal risk. If
employed properly, the Tax Deferral Strategy can save you many
thousands of dollars in saved taxes. The next time you have
profits in a long stock position that you’ve had for nine months
or more, consider using this strategy to lock in your profits –
and save money on your taxes.

Note: Be sure to talk to your broker and your accountant about
this strategy before employing it. Tax laws change regularly, as
you can see, and you should check with an expert to make sure
this strategy is still viable. It is important to consult with a
professional accountant or tax attorney before employing any of
these strategies to see which is currently acceptable with the
IRS.

Update: At the time of this writing, we have heard that the IRS
may be changing their policy on this strategy and may consider
this a ‘wash sale.’ This essentially means that the sale of a
call in this manner would constitute a sale of the stock, and
that you would still be liable for the short term capital gains
on the trade. This means. In reality, the IRS is stating that
the stock was effectively sold on the date the call was sold and
not on the expiration date of the call.

If the IRS will not let us use in-the-money options or
at-the-money options for tax deferral, then we must find a way
to use out-of-the money options to lock in the stock price for
the period of time necessary to meet the long term gain
requirement, as in the case of the collar strategy.

As you recall, the collar combines the purchase of an
out-of-the-money put, with the sale of an out-of-the money call.
The proceeds of the call sale will be used to off set the cost
of the put and thus, the total outlay of capital will be
minimal.

Looking back at the earlier example, we will now apply a collar
to protect our position price, and buy us time until thenner would constitute a sale of the stock, and
that you would still be liable for the short term capital gains
on the trade. This means. In reality, the IRS is stating that
the stock was effectively sold on the date the call was sold and
not on the expiration date of the call.

If the IRS will not let us use in-the-money options or
at-the-money options for tax deferral, then we must find a way
to use out-of-the money options to lock in the stock price for
the period of time necessary to meet the long term gain
requirement, as in the case of the collar strategy.

As you recall, the collar combines the purchase of an
out-of-the-money put, with the sale of an out-of-the money call.
The proceeds of the call sale will be used to off set the cost
of the put and thus, the total outlay of capital will be
minimal.

Looking back at the earlier example, we will now apply a collar
to protect our position price, and buy us time until the one
year mark passes.

As you remember, we were talking about a stock, XYZ, which we
purchased in January of 2003 at a price of $45.00. By October of
2004, the stock had increased in price to $82.00. If you wanted
to sell your stock and take your profit at this time, you would
have to pay the higher short term capital gains tax.

This means your profit will be taxed as ordinary income. Now if
you could get the stock to hold steady for a few more months,
you could sell and only incur the long term capital gains tax,
which could be a big savings to you.

Let’s take a look at how to properly implement the collar here.
With the stock at $82.00, you would purchase the January 2004 80
strike put and sell the 85 strike call. Hopefully, you can
execute this trade for no cost, but, in all likelihood, you’ll
have to pay a small premium for the position (which would be
well worth it).

Now that you have the January 80-85 collar on, let’s take a look
at how the position would work based on where the stock goes.