Mostly: Classical

[Sexton O Blake]

Options.. What a difference a day makes..

I watched the ROB TV program.

My overall impression - Croft implied risk with options ("very risky") but seemed to dumb it down a bit - I expected a bit more "high risk" comments. My opinion.

Regardless a very good program and he was very knowledgeable. One thing that caught me off guard was how index traded options were treated tax wise in Canada.

Typically if I buy an option and then sell the option, the difference is either a capital gain or loss.

If I buy a call and then never sell and it ends up in the money, I will receive the underlying security - and I believe (not 100%) - that the gain or loss comes from when you sell the security. Buy 2 contracts of a stock for $300 and it stays in the money, I get 200 shares of the stock. I then sell the stock. The cost of purchase is $300+commish, and the proceeds of despotism, is the sell of the stock.

But what I did hear was - when I buy a index option, and it expires in the money, I don't get the underlying index obviously, but I get the cash equivalent and that is treated as interest income. Seems like a stupid technicality to me - if I sell on the day before it expires, it is treated as a capital gain.

Thanks Kastelco for the RRSP stuff. Oddly, Croft seemed to suggest though that the PUTS in an RSP were in second reading and not law yet. But other sites suggest they are allowed.

What Croft did say was basically what is quoted here from TaxTips.CA

-call options - these give the writer (seller) the obligation to sell the property at an agreed upon price should the purchaser of the option elect to purchase the property. Call options may be written (sold) as long as the underlying shares are held in the RRSP (covered call option). Call options also may be purchased inside an RRSP.
-put options - these give the writer (seller) the obligation to purchase the property at an agreed upon price should the purchaser of the option elect to sell the property. Put options may be written (sold), but they may not be purchased. However, when puts are sold, if the RRSP is required to have cash on deposit (margin) to cover the possibility of the puts being exercised, this would cause a problem because those assets may then be representing security for a loan. The Income Tax Act does not allow assets of an RRSP to be used as security for a loan. If assets inside an RRSP are determined to be security for a loan, then the market value of those assets will be included in the income of the RRSP holder for the year.
In any case, most brokerage firms do not allow the sale of put options inside an RRSP. Some brokerages do not even allow the sale of put options outside of an RRSP.

Croft basically said that PUTS are now allowed because during the tech wreck, RSP investors were unable to protect themselves. As for the inability to SELL PUTS in an RSP - my take on what he said - without the proper tools how effective can you be. In otherwords, to be a serious options trader you cannot use an RSP account.

SoB