For Holders of Employee Stock Options and their Advisers

On July 25 2009, in a newsletter I suggested the

purchase of three vertical Jan 2011 500/400 put

spreads inside an IRA as a hedge versus 300 shares of

stock of Google.

The stock price at the time was 446 and I suggested the

following trades and adjustments as listed below in later

newsletters.

The Google stock was owned in the hedger's

personal account.

Date.....Stock...........Transactions.................P and L ............price.......... in Puts in IRA................ closed 

 

7/26/09...446.........Sell 3 Jan 2011/ 400 @ 47.8.................

7/26/09...446.........Buy 3 Jan 2011/ 500 @ 98.5.................

8/10/09...456.........Buy 1 Jan 2011/500 @ 91.............. ...........

9/19/09....491........Sell 3 Jan 2011/500 @ 71..............-$8250 (CL)

9/19/09....491........Buy 3 Jan 2011/550 @ 99.20

10/21/09....558......Sell 3 Jan 2011/ 550 @ 72.............-$8160 (CL)

10/21/09....558......Buy 3 Jan 2011/600 @ 97.5

1/04/10......627.....Sell 3 Jan 2011/600 @ 55.40.........-$12,500 (CL)

1/04/10......627.....Buy 3 Jan 2011/700 @ 109

The purpose was to take advantage of theoretical

mis-pricing of the puts and create negative deltas

versus the stock held. We also sought to

maximize the positive tax consequences of

such risk reducing theoretical advantaged

trades. On January 4, 2011, we recommended

the purchase of the 3 vertical puts spreads

Jan 2011 (700/600) mentioned above. These

trades harvest capital losses, and adjust deltas.

Google's Stock Value has increased by $54,300 as

the stock increased from $446 to $627 as of Jan 4, 2010.

The cost basis of the stock was raised by $28,910

(i.e. -$8250-$8160-$12500) from the losses on the

liquidated puts in the IRA as part of  "identified straddles".

The net un-liquidated profits on puts were

$4890= (+$11,610 - $6,720).

Total gain in value on Jan 4, 2010  = +30,280 = (+ 54,300  - 28,910 + 4,890)

 

Summary

What we did was buy a put vertical inside an IRA to

hedge long stock that we owned personally. As the

stock rose, we bought additional vertical put spreads

to even deltas a bit, whereby the puts we sold were

the puts that we had bought earlier thereby harvesting losses.

Had the stock dropped, the profits from owning

the put spreads inside of an IRA would be tax deferred

or tax free assuming the puts were sold prior to

possible stock sales.

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The Jan 2011 puts, with an exercise price of

700, were trading about 13.5 points higher

than three days earlier when the stock was 627.

If we bought a "calendar spread" where

we bought the Jan 2012 puts with an exercise

price of 700 and sold the Jan 2011 puts with

an exercise price of 700 that we owned, the

net cost would be $2000 x 3. We would be

liquidating a position in the IRA at a profit

equal to $4050.

Since the straddle rule does not address

liquidated profitable positions prior to the

unrecognized losses, the liquidated profitable

positions in the IRA would be tax free or

deferred since the put positions are in IRAs.

Current Positions June 14, 2010:

Long 300 shares of stock =  483.19

Long 3 Jan 2012 / 700 puts  = 228

Long 1 Jan 2011/ 500 put.  = 53

Short 3 Jan 2011/ 400 puts  = 17

JOHN


If the above analysis is correct, the import is

that this method of hedging versus stock is

substantially better than hedging stock

using sales of calls if a person has an IRA with

substantial assets.


 

 Liquidations of profits within 6 months are not to be made by officers and directors.