Let say a trader bought a stock (lets say March 18th 2020) now 11 months later trader wants to protects his/her gains and also want to get benefit of long term tax rates. But long term is only available after 1 year.
Lets say STOCK ABC, bought March 18 2020 for $50.
Now stock is at $160
Trader add a March 19 expiration COLLAR, Sell 170 CALL and Buy $155 PUT for $5.
Now lets say stock fell to $140 at expiration. Trader will be able to exercise $155 PUT but question is how much of this $100 gain ($50 cost of stock + $5 cost of collar, 155 -50 -5 = 100) be long term vs short term gains?
you can't add the cost of the COLLAR ($5) to your stock basis.
Only the cost of the put is involved.
The expired call option is a short term loss.
If you exercise a put, reduce your amount realized on the sale of the underlying stock by the cost of the put when figuring your gain or loss. Any gain or loss on the sale of the underlying stock is long term or short term depending on your holding period for the underlying stock.
COLLAR has 2 components.
SELL CALL -Get revenue
BUY PUT -it cost you
So in my example it works in my favor.
Buy PUT - $7
Sell Call - $2 (revenue)
Net Cost is $5
So PUT cost me $7.
In Put writing/selling there are 2 types of PUTS, Married PUT (Buy stock and Buy PUT at same time) and Just Buying protective PUT (which is my case).
Since I am achieving Long term tax gain via PUT (stock holding is long term but PUT I bought only 1 month ago). I don't think all of gain will be long term gain. I don't know answer. IRS is not business of handing over money.
Sale Price via PUT = $155 (at the time of PUT exercise stock closing Price was $140)
Cost Stock =$50
Cost Put = $7
Net = $155- $50-$7 = $98