The investment..speculation, out right gambling thread

Parent Cafe
9441

<p>@dstark – a hedging transaction is any one that effectively changes the risks of an investment – so, for example, the most simple would be when an investor who holds a stock buys a protective put. But other sort of options would also be hedges if they they essentially neutralize or change the effect of a move in the stock.</p>

<p>DocT had said that his taxable account doesn’t allow him to do spreads such as the condor you suggested - but that he might hang onto the puts in his taxable account but set up the spread in his retirement account.</p>

<p>That would be a hedge for the exact reason you suggested it: it ameliorates the risk of the losing puts. DocT loses on his puts when AAPL goes down, but he gets money back on the condor if it is set up right.</p>

<p>But IRS would not be happy. DocT was just thinking of salvaging a single bad investment, but think how easy it would be for a savvy investor to create paper losses in a taxable account and offset them all in a retirement account. Those of us who are over age 59 1/2 but under age 70 are in a very sweet spot with our retirement accounts. We have full access to the funds if and when we need them, but we are no required to ever take the funds. A Roth IRA is a double blessing – if we can manage to grow the funds exponentially, that’s a big, tax-free pay off down the line. </p>

<p>So IRS says that stuff has to be reported. </p>

<p>I have no clue how IRS enforces that rule, and being that it is a rule written by IRS, it’s a lot more complicated than that, with all sorts of ins and outs and ifs and buts. I found out about the rule when I was considering doing something along the lines of what DocT suggested, and realize that I was treading on dangerous ground. I didn’t go farther than that. </p>

<p>But I just wanted to raise the warning flag for DocT. </p>

<p>His rolling the puts in the same account is not a problem at all – it was the other idea that I was responding to. It doesn’t create an IRS problem when the options are rolled because all of the gains and losses in the taxable account will be reported to IRS by the brokerage – and rolling out an option is not a hedging move in any case. The only thing to worry about in the taxable accounts are the wash sale rules, where the transaction takes place after the first of the year. </p>

<p>So when I mentioned that I like to close out the losses by December, I also know to refrain from buying back the same stock at a lower cost during the first 30 days of the new year, to avoid the wash sale problem. </p>

9442

<p>You’re exactly correct. However I have from a good source, that the only time that this would become an issue is if you’re being audited by the IRS to begin with during which they will look at everything. I have had experience with this before.</p>

9443

<p>I would love to see what the irs has put out on trading in iras…</p>

<p>I think there are quite a few people that own the same stocks in multiple accounts. They trade in multiple accounts.</p>

<p>I was referring to this…</p>

<p>"Also, when I really gave it a lot of thought, I realized that hedging efforts weren’t really such a good idea. Here is th problem: You are losing money on AAPL puts. The temptation is to get into some other AAPL trade that “saves” you – so you are no longer losing on AAPL. Emotionally that is appealing – I know because that was my first impulse on other stocks.</p>

<p>But think about it this way: It’s just money. If you lose $1000 on one stock and make it back on another, you are still breaking even. When you hedge on a particular stock with an offsetting position --you might just be putting yourself in a delta neutral position, where no matter what happens to that stock, up or down, you make nothing. Rather than putting your money in an offsetting transaction on stock that is giving you trouble, you could put the same dollars in a better stock or option deal – one that has better potential to yield big results. Admittedly you can’t predict other stocks either – but at least diversifying works in our favor.</p>

<p>In other words: hedge on AAPL and the best you can hope for is getting closer to 0 (no loss, no gain). And you are still tied up with AAPL."</p>

9444

<p>Ok…I found this…I had no idea…</p>

<p><a href=“Can IRA Transactions Trigger the Wash-Sale Rule?”>http://www.investopedia.com/articles/retirement/09/ira-wash-sale-rule.asp&lt;/a&gt;&lt;/p&gt;

<p>I dont think people know this.</p>

<p>Thanks, calmom.</p>

9445

<p>I have not read all the posts regarding hedging but I doubt all the IRS people are smart enough to know it. These are the people that loose important things like email and such. I think the law is designed to catch the fat cats and I doubt they have the energy to deal with the little people.
I’ve dealt with the IRS all the times and each time I shake my head in disbelieve that they could be so clueless.</p>

9446

<p>Well I still have my 1/17 aapl 71.43 - 75.71 call spread. I’m pretty confident aapl will stay above 75.71</p>

9447

<p>Most hedges are not perfect hedges. </p>

<p>I have no idea how the IRS would deal with these “hedges.”</p>

9448

<p>The IRS is extremely understaffed and unable to keep up with all the tax laws and consequences. Last year I was being fined for owing an extra $40k which I had already paid. It took them 6 months to figure it out even though it was obvious that they were wrong. When I went to the IRS office, the guy who was helping me told me that typically there is 1 person per 50 audits and that it takes 8 weeks just for them to figure out that somebody has moved.</p>

9449

<p>Oh – let me simplify - this has nothing to do with tax stuff, it has to do with emotions & investing.</p>

<p>DocT has $$ to invest. (For purposes of discussion I am going to treat a credit transaction like a short sale or put-writing as a dollar investment --it’s just negative dollars rather positive when you enter that.).</p>

<p>So DocT wrote puts. The minute he wrote those puts he had a negative dollar investment on his account. I don’t remember how much money he had on the line. But it’s probably shows up as a negative entry on his account statement. Let’s say it’s -$5000. </p>

<p>DocT just exchanged his losing puts for another set of puts, and he made money on the transaction. So more money came into his account – but he also now has an even bigger negative dollar entry on the books.</p>

<p>Let’s forget the IRA stuff and fact that he can’t trade spreads in his account. </p>

<p>I’m saying there is a natural temptation to try to offset those AAPL losses in some way. A very simple way would be to buy some puts – that essentially creates a vertical spread. So, if he has short puts at $99 and buys long puts at $96 he has now limited his risk. He also cuts into his potential profit because of what he paid for the lower strike put --but now the maximum he can lose is $3 per share-- and if the iPhone launch next week is disastrous and AAPL falls to $92… he would be very happy he bought those puts. So there is a temptation to do just that – that is what you were suggesting with the condor, except somewhat more complicated. End result is the same – there is a way that he can step in and limit loss. </p>

<p>He decided to roll out instead, which is just putting off the potential loss to another day. Probably will work out fine for him in the end. (Again, I’m still bullish on AAPL. But unlike DocT I can’t lose. I bought at $91 and I have a stop-loss several notches higher than that, so I come out ahead of where I started no matter what). </p>

<p>But let’s say the rollout doesn’t work out so well. Let’s say that AAPL continues to moves down and by mid-October is trading in the low 80s. And lets say that instead of investing in AAPL, he could have been investing in some other stock - let’s say, YHOO. Let’s assume that the Alibaba IPO goes smashingly well, so at the same time AAPL’s stocks are tumbling, YHOO skyrockets. </p>

<p>I’m just saying that an investor who says, “forget AAPL” and takes the loss and moves on, and instead picks a different stock with different prospects, stands to make more money. Of course that depends on his ability to pick a winner instead of another loser, but the universe of potential winning investments is larger than the field of things we already own. (Of course, many investors can do both – try to nurse their losing investments back to health while at the same time making new investments, and as long as the loss exposure is not higher than the investor’s loss tolerance- there’s nothing wrong with that. I’m just analyzing things as if it were a zero sum game for purposes of simplicity) </p>

<p>Anyway, DocT can do whatever he wants, I don’t care. I am just saying that I realized, for myself, that it was better in general for me to cut my losses and move on to greener pastures than to stick around and try to use option trading to fix my past mistakes. </p>

9450

<p>Doct, you are kicking butt.</p>

9451

<p>Since I’ll be out of commission for three weeks, I can’t really follow weekly options. I’m thinking of buying the 10/3 200 - 199 and selling the 192-180 put spreads for roughly a cost of 0. Using a gaussian distribution, the probability of hitting 192 is 17.6% and support looks like it’s around 191. </p>

<p>Most of my other options are expiring in January since I was expecting to start working less from October on so I would have less taxes to pay next year as opposed to this year. Unfortunately, we’re so busy where I work that they won’t let me work 60%. </p>

<p>My problem is with those aapl puts which I need to handle and push out; buy them back and sell options in another stock that has roughly the same volatility and price or use something else which I’m going to have to figure out tonight.</p>

9452

<p>@DocT – I understand what you are saying about the IRS – it’s just that I find it better for my own peace of mind to avoid doing things that could get me in trouble later on. </p>

<p>It’s like exceeding the speed limit. 99.9% of the time you don’t get caught. But then you do. </p>

<p>The case that dstark found discussed in investopedia is from someone who did get caught – the IRS ruling would never have been issued but for the fact hat someone ran afoul of it and IRS was able to discover what happened. </p>

9453

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<p>I have the same problem – a few months ago I received a notice that claimed I hadn’t reported income in 2012 based on some 1099’s I had – and of course those were included in my schedule C’s. I just sent them the worksheets from my HR Block software with the amounts circles and a letter of explanation – then they took forever to respond. (Basically with a letter that said, “never mind”).</p>

<p>The problem is that it tends to start with a situation where IRS has already screwed up and the burden is on us to show them where they are wrong. If it moves to an audit situation, you really do run into a situation where you might run into the one auditor with OCD who decide to really start digging. </p>

<p>(I was audited once and the auditor wanted to see all my credit card receipts for all my business expenses. I brought in a file filled with credit card statements and receipts – he glanced at it and said m’kay, and it was fine. Which was good for me because that file had all my personal stuff mixed in with business – my taxes were right, but I hadn’t spent the time sorting out the files first. Figured it wasn’t my problem. )</p>

9454

<p>Calmom, I did not know that ira rule and I need to know that rule. Thanks. Knowing that rule is going to help me. </p>

<p>I dont view the trade I suggested as a hedge. It was a way to participate in a small bounce or if the stock was flat, a way to make money.</p>

<p>It turned out to be a great trade… Stock dropped, the trade went up. I would have closed at least half of it today with the stock below 98.30. </p>

<p>I tried to buy that trade for 5 hours.</p>

9455

<p>So doct, you arent going to retire?</p>

9456

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<p>It wouldn’t be a hedge for you, because you didn’t have a put trade that had gone bad to offset.</p>

<p>It might have been a hedge for DocT,though.</p>

<p>I’m saying “might” because the hedge rules are very complex – it made my head spin just to read about them and I gave up. I just made a mental note, “don’t mess with this”.</p>

<p>I don’t think it means that if I have AAPL in my taxable account that I can’t ever do option trades on AAPL in my IRA – I just think that under some circumstance, the nature and the timing of the transaction could cause a problem. </p>

<p>(I kind of figure as long as I don’t “go there” inside my own head – if I just buy and sell in my accounts separately without any intent to offset losses in other accounts, I’m unlikely to do anything stupid. My emotional response to losing money on a stock is of avoidance anyway. Instead of thinking “I need to get back the money I lost on BBY” I think, “I lost money on BBY, I hate BBY, I will never trade BBY again!” So instead I buy QCOR …and voilà! I make back way more money than I every lost on BBY.")</p>

<p>DocT is right that it probably wouldn’t come up for the average taxpayer. I just never really have been comfortable with the thought process based on, “I probably won’t get caught.” I did practice law for roughly 20 years. Most of my criminal clients were people who had been pretty certain they wouldn’t get caught. </p>

<p>But everybody can make their own decisions on that. </p>

<p>I just think that what is even sadder is if someone makes a mistake that causes problems and the reason is, “I didn’t know.” Because IRS generally doesn’t care about that – they figure its your job to know, and they are very happy to educate you by taking your money.</p>

<p>So now you know.</p>

9457

<p>I still plan on retiring, I just won’t be easing into it like I wanted. </p>

9458

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<p>That guy is Bret Jensen. He is very good. </p>

9459

<p>I dont do anything sketchy. The franchise tax board owes me money if I file an amended return. I am not pursuing it because I dont want to go through an audit. I dont want to take the time, deal with the cost of an audit, gather credit card slips like you had to do. I paid state taxes in Illinois and forgot to take the tax credit in Cal.</p>

<p>A friend went through an audit and it cost him $15,000 and there was no material change. </p>

<p>I am not talking about the tax ramifications of the trade. If the irs called the trade a hedge, I would have to show the irs a few things. Short in the money puts and short an additional put spread is a pretty crummy hedge. </p>

<p>If the stock rises… You are short a call spread. Not a great hedge either in this case because the downside protection is extremely limited and you lose if the spread comes into play by .30. </p>

<p>If doct said he thought the stock was going to continue to drop, this is not the trade to do…he said the stock was going to bounce.</p>

9460

<p>I’m not comfortable selling that April 100 - 85 put spread for $6.23. First , I’m not confident that aapl is going to end up near it’s all time high or that trade is going to stay above the breakeven of 93.77. I rather trade weekly puts at lower and lower prices.</p>