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JLS   Wednesday, 02/19/14 06:02:10 PM
Re: Qone0 post# 1969
Post # of 2000 
Q,

You also did the calculation incorrectly, but mine most closely displays reality as it will unfold over time.

You don't make these types of trades so you don't know how they are done or how they are reported to the IRS.

In reality, there are two separate trades, two separate calculations -- one for Puts, one for Calls. But it is perfectly fair to combine them into one result as I did (not as you did) in order to display the most probable outcome. That outcome will be reported to the IRS over a two-year interval because the Puts expire next year, not this year.

When options trades like this are initiated as a pair, it is acceptable to refer to them as being one trade rather than two trades, and to combine P&L into once concept (though they have to be reported to the IRS separately).

In these types of trades, the Puts aren't closed, they are allowed to continue to expire. So the closing price of the Puts should be shown as $0. They are never closed by buying them back. That was your major error.

I've done these trades before, so I can tell you pretty much what is going to happen and what the most probable outcomes of these two trades are going to be.

The most significant part of the trade will close sometime this year as I sell the Calls. I will never buy the Puts back, and they are not part of the gain calculation reported to the IRS for this year's trades no matter what happens to the Calls. The reported gain on the trade will be calculated as the difference between the cost of the Calls and the sales price of the Calls, then that result multiplied by the number of underlying shares. This will all take place long before the Puts expire next year. Never mind the fact that I sold the Puts this year and the money from the sale is either in my pocket or spent. But since the Puts were part of a paired trade, it is fair to account for the gain obtained by selling the Puts, and that gain offset the cost of the Calls.

It could be that near the expiration of the Puts, January of next year, ZNGA isn't doing very well and has dropped to the point that shares are assigned to me. That assignment becomes a separate transaction, the beginning of a third trade. That would also be the end of the Put trade. The gain that I received by selling the Puts would still be there, but that gain would be reported as next year's gain, not this year's gain.

The most probabe outcome is that the Puts will expire worthless, and it will be reported that way whether or not there is assignment. If there is any damage done due to the Puts, it will be that I paid the exercise price for the stock, not the market price for the stock. I have been assigned stock before, so I know how it works. Selling Puts for the sole purpose of being assigned stock is a common way that many traders use to acquire stock.


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