Current Options
Disclosure Document
(PDF Format) 

Summer 2001, Volume IV, Issue 3    

Considered Responses: Hedging ISO Stock


The Tax Act of 2003 lowered the rate for long-term capital gains to 15% and eliminated the 18% rate.

Twenty-First 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 period?


To continue 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.

This article and other articles are provided for information purposes only.  They are not intended to be an offer to engage in any securities transactions or to provide specific financial, legal or tax advice. Articles may have been rendered partly inaccurate by events that have occurred since publication.  Investors should consult their advisers before acting on any topics discussed herein

Options involve risk
and are not suitable for all investors.  Before engaging in an options transaction, investors must review the booklet "Characteristics and Risks of Standardized Options".  



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