Responses: Hedging ISO Stock
The Tax Act of 2003 lowered the rate for long-term
capital gains to 15% and eliminated the 18% rate.
Securities recently heard from an investor who exercised a
qualified stock option and now has a large unrealized gain on the
position. If the
investor sells within one year of exercise (or two years of the
option grant date), the gain will be taxed at the highest marginal
rate. If he sells
after these holding periods have elapsed, the gain will receive
long-term capital treatment, with a tax of 20% (or 18% after five
years). For this
reason, the investor would prefer to hold the stock for at least
the requisite holding period.
However, many hedges will stop the holding period clock.
Is there any way to hedge without destroying holding
accruing holding period, the investor could structure a hedge
consisting of non-purpose debt combined with the writing of an
out-of-the-money qualified covered call
(QCC). Twenty-First Securities can arrange such a borrowing.
The stock would serve as collateral for the loan.
Since the debt payments would not be tied to the stock
value, the loan and stock should not constitute a straddle.
The call should be listed and have over 30 days remaining
to expiration. This
technique could also
work for hedging stock with unrealized short-term gains.
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information purposes only. They are not intended to be
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and are not suitable for all
investors. Before engaging in an options
transaction, investors must review the booklet "Characteristics
and Risks of Standardized Options".