Affiliate: Sometimes called a control person.
An individual or entity in a position to exert direct
influence on the actions of a corporation.
Executive officers, directors, and owners of more than
10% of the voting shares are affiliates.
American-Style Option: Option that the buyer can exercise at any
time between the date of purchase and the expiration date.
At-the-Money: Refers to an option with an exercise price equal to or very
near the current price of the stock.
Call: An option in which the holder has the right
to buy a fixed amount of the underlying security at a stated
price (the strike price) within a specified period of time.
Cashless Collar: Also known as a zero-cost collar. The collar is created by buying an out-of-the-money put and
simultaneously selling an out of-the-money call, with the strike
price of the call set so that the call premium is exactly enough
to pay for the cost of the put.
See Income-Producing Collar.
Constructive Sale: Section 1259 of the Internal Revenue Code sets forth
conditions in which investors will be treated as having
constructively sold an “appreciated financial position” by
virtue of having hedged away all of the possible risk and
In the wake
of the constructive sale rule, collars have emerged as the most
efficient way to protect stock gains within the parameters so as
not to trigger gain. However,
certain tax traps are associated this technique.
The Taxpayer Relief Act of 1997 allows collars, but it
reserves the right to object to “abusive” transactions.
information on collars, see “Hedging
Equity Flex Options: Also known as E-Flex.
Exchange-traded options that allow the investor to
custom-tailor most contract terms, including strike price,
expiration, and exercise style. E-Flex options enjoy certain tax
and non-tax advantages over OTC derivatives.
European-Style Option: An option in which the buyer can exercise
the contract only on the last business day prior to expiration.
This style is widely used with collars.
Forward Contract: A
contract to deliver securities (or other property) in the
Income-Producing Collar: A collar
structured to generate positive cash flow. The collar is created
by buying a put and simultaneously selling an out-of-the money
call to pay for the put and to generate approximately a money
market rate of return. See Cashless Collar.
In-the-Money: Refers to an option contract with intrinsic
value. For example,
a call option
in which the underlying security is selling above the strike
price, or a put
option in which the underlying security is selling below the
Lock-Up Agreement: An agreement that restricts when an
individual can dispose of his or her stock.
Low-Basis Stock: Stock that was originally purchased for a
low price relative to the current price. Cost basis is the
effective purchase price that an investor uses to compute tax
Monetize: borrow against.
Monetization allows an investor to create a
cash balance without liquidating the stock.
Out-of-the-Money: Refers to an option that has no intrinsic
value. For example,
a put option
in which the stock is selling above the exercise price or a call
option in which the stock is selling below the exercise price.
OTC: (over-the-counter) Refers to a market in which securities
transactions are conducted through a telephone and computer
network connecting dealers rather than on the floor of an
exchange. The terms of these transactions are privately
negotiated and entered into between the investor and dealer.
Prepaid Variable Forward: A type of forward sale contract in which the investor
receives an up-front payment in exchange for a commitment to
deliver securities in the future, with the number of shares to
be delivered varying with the underlying share price. See Forward
Contract, Variable Forward.
Put: An option in which the holder has the right
to sell a fixed amount of the underlying security at a stated
price (the strike price) within a stated period of time.
Federal Reserve Board regulation that governs the
extension of credit by brokerage firms to customers for the
purpose of purchasing or carrying additional securities.
Straddle Rules: Internal Revenue Code Section 1092 defines
and governs straddles.
Under the straddle rules, when a position is deemed to be part
of a straddle, any loss realized from closing one leg is
deferred to the extent there is any unrealized gain on the open
leg; however, any gain realized from closing a leg of a straddle
must be recognized immediately. Interest expense incurred to
“carry a straddle” must be capitalized, as opposed to being
Straddle rules apply to positions in stock established
after December 31, 1983.
Strike Price: Also called exercise price.
The price at which the stock or commodity underlying a
call or put option can be purchased (call) or sold (put) over a
Relief Act of 1997 (TRA’97):
Significant tax legislation which, among other provisions, added
Code Section 1259, titled “Constructive Sales Treatment for
Appreciated Financial Positions,” to the Internal Revenue
Code. The constructive sale rule significantly altered
conditions for hedging and monetizing low-basis equity
positions on a tax-deferred basis.
See Constructive Sale.
Variable Forward: A
type of forward sale contract in which the investor commits to
deliver securities (or other property) in the future for a fixed
value today, with the number of shares to be delivered varying
with the underlying share price. See Forward Contract,
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