Tax Code Restrictions

Several options strategies are available to provide a complete, cost-free hedge of your stock profit. Unfortunately, the IRS does not allow such strategies to be employed for the purpose of postponing a tax payment. The IRS refers to such disallowed hedges as constructive sales. There is no need to dwell on the complicated definition of what constitutes a constructive sale, because our concern here is in a useful strategy that is allowed.

The IRS does permit the use of the married put strategy (see Chapter 17, “Married Puts”) to protect profit in a stock. This strategy has the drawback that it is not cost-free, and in fact can be quite expensive in some circumstances. The married put strategy involves buying a put option ...

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