Tax Write-Off Trades

Most readers know I’ve had a fantastic year. When trading you don’t pay taxes weekly like you would holding a job; you pay at the end of the year when you do your tax returns before April 15th.

Before I get into my tax write-off motivated trades I want to go over a few rules I’m trying to take advantage of.

There were a few questions on when a profit gets entered onto your 1099, the current year’s, or next year’s. Since I’ve had a great year I’ve been trying to defer some profits to next year’s income with the choosing of my Expiration Dates. I was selling Calls in December with the Expiration Date of 1/8/21 or 1/15/21. I did not want to make any more money this year. I wanted future income to go toward 2021’s income.

I received a few questions asking, “if you sell a Call in December the premium goes into your account immediately, why would it go toward next year’s income?”

I decided to call my broker, Charles Schwab to ask. When I called I asked for the accounting dept. Here’s a few things I found out about positions that were bought or sold on the cusp of a new year.

Buy to Open: When buying an option in the current  year and do a Sell to Close on the last trading day of the year, this profit or loss will be on the 1099 of the 2020 tax year. When you Sell to Close in the new year the profit or loss will be on the 1099 of 2021.

Sell to Open: When you sell an option in the current year and do a Buy to Close on the last trading day of the year, this profit or loss will be on the 1099 of 2021. When selling options and doing a Buy to Close it takes 1 business day to settle. That settlement date will be in the new year and it will go on the 1099 of 2021. I was told the premium of the option that you receive in December will also go on the 1099 of 2021 because the total profit or loss of the trade is determined by whether you are assigned or not. This profit or loss will be determined when the position is closed. And since it takes 1 business day to settle, if the Buy to Close is on the last trading day of the year, the settlement date will be in the new year.

Another Sell to Open: When you sell an option in the current year and do a Buy to Close in the new year, this profit or loss will be on the 1099 of 2021. This is for the same reason as in the example in the paragraph above.

If you look at my Active Trades/Current Positions page you will see a large number of trades to expire on 1/8 or 1/15. Both Covered Calls and Roll-outs. My Peloton will be a major part of this article.

Before I get into my Peloton Covered Call, and how I used it for a tax write-off, I want to talk about how a Covered Call works that is In-the-Money on Expiration Day.

Most readers know how I feel about Opportunity Lost. If not please read the page.

In-the-Money Covered Call example: XYZ stock is at $19. I buy 1000 shares and sell a 10 contract $20 Call to expire the next Friday. I received a $1 premium for $1000. On Expiration Day the stock is at $25. I deliver the XYZ stock at $20 and make $1000 on the stock sale. My total profit is the $1000 premium and the $1000 on the stock sale for a total of $2000. If I never sold the Call option and only owned the stock I would have made $5000 on the stock. Because I sold the Call I have a $3000 Opportunity Lost. I signed up for the $2000 and I’m happy with that. I do not let the Opportunity Lost of the $3000 bother me.

There is another thing I could have done. If I think XYZ stock was gonna continue up I could do a Buy to Close to get out of the obligation of delivering the stock. If I decided to do a Buy to Close the premium would be in the area of $5.25 or $5.50. It’s according to how many days are left before expiration. The stock is $5 In-the-Money so you have the $5 of Intrinsic Value, plus a little Time Value. Let’s say the premium is at $5.50. The Buy to Close will cost you $5500. You keep the $1 premium for $1000 so you are down $4500, but you own 1000 shares of the stock you can sell at a $6000 profit because you bought the stock at $19 and it’s now at $25. You are still ahead of the game, and you own a stock that is moving up which gives you more potential.

If you let your Call expire, and did nothing, you would have been up $2000. If you do the Buy to Close you are up $1500 but still own the hot stock. These numbers are pretty close to a real situation. The problem is when you do the Buy to Close sometimes the stock drops down and you end up losing money.

Keeping this example in mind let me talk about my Peloton trades.

I bought 2000 shares of PTON at $134.12 and sold a $135 Call for a premium of $2.15 for a total of $4300. This Call was to expire on 12/24.

On 12/21 news came out that PTON was buying a company called Precor. The market loved this news and the stock shot up to $165. My Call is now In-the-Money by $30. I would normally accept the large Opportunity Lost and let the Call expire. But because I had huge profits this year I’m looking for tax write-offs. I figure if I did a Buy to Close it would cost me a lot of money, but I would own the stock which is at a much higher price. The money it cost me to do the Buy to Close would be a loss. It would be a Tax write-off! But if I hold the stock into next year, and it continues up, I could take the gain on the stock in January.

I decided to look at the premium to see what a Buy to Close would cost. The premium was at $30. I did the Buy to Close on the 20 contracts which cost me $60,000. If the stock stays high I can make over $60,000 on the stock sale in January.

11/30/20 – Sell to Open 20 PTON 12/24/20 $135.00 C @ $2.15 (+$4300)

12/22/20 – Buy to Close 20 PTON 12/24/20 $135.00 C @ $30.00 (-$60,000)

Loss -$55,700

If I did not make this move I would have had the $4300 premium and the approximately $2000 gains to go toward my 2020 income. With my move I have a total of $55,700 tax write-off instead of the $6300 gain. And I still own the stock which is up about $30 from my buy-in price for a $60,000 profit. Yes the stock can go down and I don’t get this profit but I think getting the $55,700 write-off was worth the shot with this hot stock.

Now that I own the stock with no Call attached to it I sold some more Calls to hedge in the case the stock did go down. I sold a 20 contract 1/8/21 $175 Call for a premium of $5 for a total of $10,000. Plus I sold another 10 Naked contracts for hedging. I sold 10 contracts of the 1/8/21 $180 Calls for a premium of $5 for another $5000 of hedging. These 2 Calls are below.

12/22/20 – Sell to open 20 PTON 1/8/21 $175.00 C @ $5.00 (+$10,000)

and

12/22/20 – Sell to open 10 PTON 1/8/21 $180.00 C @ $5.00 (+$5,000)

If I did nothing I would have made $6300 letting the position expire. With the moves I made I believe I’ll make a lot more money. Plus getting a $55,700 tax write-off for 2020. The big profit will go toward 2021, if this works the way I think it will.

This is a Roll-out. The final result will be listed as a profit or loss week ending 1/8/21. All the positions are listed on my Active Trades/Current Positions page under Roll-outs. I also have a Tesla Roll-out listed which will expire 1/15/21.

I think this Peloton move was a great way to grab great profit that will go toward 2021, and give me a huge write-off to go toward 2020.

I also have another 20 contract Covered Call going with Peloton that will expire on 1/15/21. I’ll watch the stock this week. If I think the Peloton Roll-out will work well I might do another Roll-out for another great tax write-off. We need a good Santa Claus rally!

My December has been making trades, pushing the profits toward 2021 to cut down on the 2020 profit. Plus making moves like the one with Peloton to get a write-off while deferring the profit to 2021.

I did not read this maneuver anywhere, I just used common sense. This is the type of thinking you need to do to be a successful option’s trader. If Peloton stays above the $162 area this will be a big winner. If the stock drops down it could get painful. Since Peloton is a hot stock I think it was a smart move. Time will tell!

I will be watching the market but won’t be making trades. I’m pretty much fully invested in positions that will expire 1/8 or 1/15. Normal trading will resume after 1/15. However, I might make a few trades to generate a few more tax write-offs. I’m set up for a very nice January. While not trading I’ll be working on Main Street beats Wall Street. I want to make some changes for the new year and add the “Grasshopper Trades” page.

We must manage our accounts to keep as much of our gains as possible. If you have any questions on my tax write-off trades please send me an email. I should have plenty of time to answer quickly.

Successful trading,

Steve

The options Coach