I have 300 shares in a regular account with basis 166, trading @ 500. I have over 300 shares of the same in an IRA. I plan to sell 300 shares in the IRA; write 3 puts in the IRA for less than $10,000 total credit (the rounded up total of the asks minus some % of the bid-ask spread); and buy the same 3 puts in the regular account for ~$10,000 debit. The expiration dates are spread out over three years, I.e., January of year 1, Jan. year 2, and Jan. Yr. 3.
My question is basically how the weird, offsetting put positions are treated. I assume if this is a bad idea, it’s because of complicated tax law regarding offsetting positions, and that’s what I’m hoping somebody can answer to, but I will accept any good criticism or support you have of the idea if it’s relevant and verifiably accurate. I also welcome alternative ideas, but they are off topic if they don’t address why not to do this one.
Here’s how the idea came to be:
I hold 300 shares in my taxable account, worth $500 each. I’m aiming to turn this into a cash cushion to fund a three-year break from work by selling them for $150,000. That’s $50,000 per year.
I fear a hefty tax bill due to this year’s work earnings. So, Instead of selling them, I bought put options to hedge against stock drops.
The put expirations are spread out over three years.
Looking for ways to offset the cost of the puts, I think of writing put contracts in my Roth IRA (among other things like just writing calls.) Writing the puts seems like a bad idea at first because it mathematically removes the hedge on the shares. But then, with the IRA in mind, I realized that I don’t need a hedge on the shares if I just sell. If I’m worried about taxes of creating a large cash cushion in one tax year now, why not just sell $150,000 worth of shares in the IRA instead of the taxable account? The obvious answer is that I’m not retirement age and so I don’t have access to the funds if I do that. But the short put positions in the IRA and long put positions in the taxable account create an interesting situation if they are the exact same contracts and were opened at the money.
At expiration, if the market is down, I exercise the contract in the taxable account, getting $50k as planned. I get assigned In the IRA, forcing me to buy back shares at the sale price. So I’m good there.
If the market is up, the taxable account gains, offsetting the put cost. I can sell $50,000 worth of shares as planned. The IRA puts will expire worthless, and I won’t be able to buy as many shares back as it sold due to the price going up, but I don’t mind that scenario at all because it’s offset by not needing to sell as many shares as planned in the taxable account.
This approach spreads taxes, potentially shifts wealth from the IRA to the taxable in a manner that is attractive to me, and limits risk where I want it to at the expense and addition of risk where they are not problems for me.
I don’t see a downside. What am I missing?
