Friday, February 19, 2010

Get Paid To Move Your Positions

Normally if you want to transfer your securities from one account to another you have to pay a broker to do that for you. This is certainly a preferred method in taxable accounts, since selling in one and buying in another would trigger a tax consequence and possibly incur significant costs from commissions if you have a lot of positions to move. If your securities are in a tax sheltered account though, you can use options to move those securities and generate income rather than an expense.

Options sell at a premium. If the underlying price is $70.00 and you buy a put option with a strike price of $75, you can expect to pay more than $5.00 for the privileged of selling the position at a higher price than it is at the moment. You can use that to your advantage in this position moving scenario by selling the option in the account where you want the position to be at the same time you sell the underlying in the account you no longer want it.

Here's the dollars and cents of it:

Account A:
Sell 1000 XYZ for $70.00.
Income: $70,000

Account B:
Sell 10 XYZ front month in the money $75 puts for $5.30
Income: $5,300

At Expiration:
Assign $75 put.
Expense: $75,000

Net: $70,000 + $5,300 - $75,000 = $300.

Assuming you aren't doing business with Lame Broker's LLC, the $300 net gain should be well above the cost of commissions.

The key point is you need to make this move when the markets are stable and reasonably predictable so the underlying doesn't shoot up so much in price that your option does not get assigned (unless it is also desired that you be out of the position at the strike price anyway). The days immediately after earnings is a good time to do this as you will get a good idea of price direction, and most market moving surprises about the fundamentals of a company come out at that time.

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