unwinding LEAPS and tax consequences

[dakh]

I try to maximize LEAP use in my 401K but I do have some in a taxable account. I'd like to understand what's my best strategy to deleverage. Especially relevant in a short squeeze scenario of course but applies to any.

All of my LEAPS at this point are long term holdings. Some are 2019, some 2020.

My understanding is that the most optimal strategy from the tax perspective, if I simply want to keep funds in TSLA or derivatives and reduce leverage, is:

1. Outright sell LEAPs expiring in 2020 to get the time value back, take the tax hit
2. Do the math on 2019's to see if it's better to sell and take the tax hit and use proceeds to buy stock, or use proceeds from #1 to exercise those options and avoid paying taxes but missing out on time value.

Does that sound about right?

 

[neroden]

Yes.

 

[ggr]

I try to maximize LEAP use in my 401K but I do have some in a taxable account. I'd like to understand what's my best strategy to deleverage. Especially relevant in a short squeeze scenario of course but applies to any.

All of my LEAPS at this point are long term holdings. Some are 2019, some 2020.

My understanding is that the most optimal strategy from the tax perspective, if I simply want to keep funds in TSLA or derivatives and reduce leverage, is:

1. Outright sell LEAPs expiring in 2020 to get the time value back, take the tax hit
2. Do the math on 2019's to see if it's better to sell and take the tax hit and use proceeds to buy stock, or use proceeds from #1 to exercise those options and avoid paying taxes but missing out on time value.

Does that sound about right?

The main reason to exercise LEAPS before expiry would be to start the capital gains clock on the corresponding stock, while not actually incurring any tax, since exercising is not a taxable event. I have been known to do this when the LEAPS became deep in the money, say when the strike is less than half of the current stock price. Generally speaking the time value has mostly gone away at that point. So basically the time value to me of not paying any tax now outweighs the loss of the time value remaining in the options.

Your 2020 LEAPS can't (unless I'm miscalculating) be sold for long term gains yet, right? Just checking. So selling them would be short term/income. So the answer depends on your particular situation in terms of tax brackets and so on, and anyway IANATL. This is what spreadsheets are for.

But getting back to the short squeeze scenario for a second... by definition during a squeeze, the volatility is high, so even if the options are DITM they may still have lots of time value. It's easy to calculate, it's just T= strike plus option_bid minus stock_bid. If the time value is high, just sell 'em. That's only because you are intentionally trying to de-leverage though. The answer changes if you want to be greedy.

 

[dakh]

Yes.

Thank you Sir!

 

[dakh]

The main reason to exercise LEAPS before expiry would be to start the capital gains clock on the corresponding stock, while not actually incurring any tax, since exercising is not a taxable event. I have been known to do this when the LEAPS became deep in the money, say when the strike is less than half of the current stock price. Generally speaking the time value has mostly gone away at that point. So basically the time value to me of not paying any tax now outweighs the loss of the time value remaining in the options.

Your 2020 LEAPS can't (unless I'm miscalculating) be sold for long term gains yet, right? Just checking. So selling them would be short term/income. So the answer depends on your particular situation in terms of tax brackets and so on, and anyway IANATL. This is what spreadsheets are for.

But getting back to the short squeeze scenario for a second... by definition during a squeeze, the volatility is high, so even if the options are DITM they may still have lots of time value. It's easy to calculate, it's just T= strike plus option_bid minus stock_bid. If the time value is high, just sell 'em. That's only because you are intentionally trying to de-leverage though. The answer changes if you want to be greedy.

Dang, my bad, of course 2020 are short holding period. So it's quite a bit more more complicated. Double dang. Thanks for pointing that out.

Looking at specifics, ironically, $300 strike 2019 options cost the same as $350 strike 2020's ($95 and change). And 2019 $200 strikes I have pretty much have no time value, only $4 (but I'm sitting on over 400% gain as of close today).

My head starts to spin a bit on how to figure out an algorithm for an absolute best way to sell it, but I think I can get close enough by just selling contracts with little time value and long holding period, then doing simple math on miss out on time value vs. take the tax hit on the rest for those. Sort them by how much better exercise is vs. sell (if any), use available cash to exercise from the top of that list until out of cash, sell the rest. That is, if I want to fully de-leverage everything. Of course I could just leave some of those 2020's be, I'm guessing I'd be keeping ones with lowest strikes in the same name of de-leveraging.

 

[Navin]

Dang, my bad, of course 2020 are short holding period. So it's quite a bit more more complicated. Double dang. Thanks for pointing that out.

Looking at specifics, ironically, $300 strike 2019 options cost the same as $350 strike 2020's ($95 and change). And 2019 $200 strikes I have pretty much have no time value, only $4 (but I'm sitting on over 400% gain as of close today).

My head starts to spin a bit on how to figure out an algorithm for an absolute best way to sell it, but I think I can get close enough by just selling contracts with little time value and long holding period, then doing simple math on miss out on time value vs. take the tax hit on the rest for those. Sort them by how much better exercise is vs. sell (if any), use available cash to exercise from the top of that list until out of cash, sell the rest. That is, if I want to fully de-leverage everything. Of course I could just leave some of those 2020's be, I'm guessing I'd be keeping ones with lowest strikes in the same name of de-leveraging.

Sell a higher priced strike against the initial call - collect premium and let it ride out. Google bull call spreads for more info