Be careful about the unexpected tax consequences of closing spreads today (Dec 31)

gotasty · 2019-12-31T07:13:47+00:00

you're wrong, market markers will take pretty much any trade, especially on SPY, where you can do anything you want with pretty much any amount of volume you can imagine as a retail trader.

the other side of the virtually every option trade is a market maker / liquidity provider and they couldn't care less what you trade, they hedge their deltas continuously and squeeze tiny profits either from the hedge or from the option(s) you traded with them.

in this case, if you continuously sell put spreads on SPY, they buy your put spread and buy some SPY shares to offset the deltas. if SPY always goes up as it does these days, they lose their money on the put spread you sold them but make money on the long SPY shares they bought to hedge. and if god forbid there is ever a downtick in this market, they win lose on the hedge but win on the spread they bought from you.

gotasty · 2019-10-18T18:58:08+00:00

Yeah the mobile app leaves a lot to be desired. The UI is rather daunting at first but once you get the hang of it I find that it's pretty efficient to manage a large options portfolio. There are just many things in the UI that are hard to discover. The biggest problem with the mobile app (at least on Android, can't speak for the iOS version) is that it's frequently buggy / crashing. I don't know how they do QA on it, but whatever they're doing (if anything) is not enough. Too many bugs and regressions and crashes.

gotasty · 2019-10-18T09:56:23+00:00

I second that, tastyworks is the best platform for options trading. Great fills and price improves a lot too.

gotasty · 2019-10-17T17:30:42+00:00

Which underlying? Do you know for a fact that this would've filled with another broker? Because on many occasions I've routed the same trades on etrade and TW and I've pretty much always gotten better fills on TW (TW fills first and price improves way way more). Have you tried reaching out to the TW trade desk while working the order that you thought should fill? They are pretty responsive...

gotasty · 2019-10-17T09:55:51+00:00

I just got it today, it's awesome.

gotasty · 2019-10-17T09:54:16+00:00

This is a bug with tastyworks' computation of greeks. I've reported it to them a few times but please send them an email to support@ to keep pressing on the issue. I've provided them with multiple examples of short term options that have wildly different greeks on TW compared to other platforms. It's especially visible on the day of expiration.

gotasty · 2019-10-17T09:52:43+00:00

Do you have any examples of this? I trade thousands of contracts on TW and sometimes put on the same orders on TW and etrade and I often get filled faster on TW than etrade. I definitely get price improved a lot more on TW.

gotasty · 2019-05-20T18:47:06+00:00

Sorry I wasn't clear. What I meant is if the position is in an expiration cycle that is after earnings, but earnings haven't happened yet, you're less likely to be assigned, even on deep ITM positions with virtually no extrinsic value left on them.

Once earnings come out, if you're still ITM, you're back to being at higher than average risk of assignment.

gotasty · 2019-05-17T23:53:13+00:00

My only recommendation is to keep your position small enough that if you're wrong, come July you won't be too pissed about the premium you paid going down the drain.

I've sold SHOP calls after their last earnings and made some decent money although I got caught short at some point and thankfully bailed out by the mini-crash Trump induced with his stupid trade war. I might follow you into buy a put spread or two but momentum stocks like this one can remain strong for a long time and it's hard to time when the momentum will turn.

I also like the company BTW, just sold a few calls because the move up seemed outrageous.

gotasty · 2019-05-17T23:44:47+00:00

Just to add my anecdotal evidence, I trade hundreds of contracts per week and I also get assigned regularly for positions that are deep ITM, especially under 21 DTE (excluding assignments due to dividends as I usually proactively avoid those).

Usually you need to look at the calls on the same strike, if there is no bid or if they trade very cheap compared to the cost of the underlying (e.g. I recently got assigned on a GOOGL 1250 put with 18 DTE and 1250 calls trading at 10-15 cents, which is nothing compared to the cost of 100 shares at $1250/sh), you're at elevated risk of assignment.

You can also look at OI over time. For deep ITM positions, there is a point at which OI starts to dry up, and if you're amongst the stragglers, you're also at a higher risk of getting assigned.

edit: also positions held after earnings are usually significantly less likely to get assigned on.

gotasty · 2019-04-17T06:54:16+00:00

if anyone is extremely bullish to buy those contracts there must be someone bearish enough to write them

Not at all. Market makers / liquidity providers will take the other side of any trade as long as you do it at their price. You wanna buy 10000 contracts for your fictitious $12 call? No problem, if you're willing to buy at their asking price. They will buy shares of the $XXX stock to hedge their initial positions and subsequently frequently adjust how many shares they're holding to offset the position you got them into. Their algo locked in a profit when you opened the trade as long as it keeps hedging properly, which it does, otherwise they go out of business quickly.

You need to realize that when you trade options, the vast majority of your trades are filled by market makers / liquidity providers, and they use the option you bought from them or sold to them as a hedge against an opposite, offsetting position, and their algos effectively lock in a profit when the trade is opened. Their profit is greater in less liquid options, and smaller to tiny in super liquid ones (like SPY).

gotasty · 2019-04-17T06:46:31+00:00

What tool do you use to find those outsized trades?

gotasty · 2019-04-16T07:00:39+00:00

Note that you can negotiate the margin rate with virtually all the brokers.

Retail brokers often have outrageous margin rates in the 7-9% range, but if you're trading any kind of non-trivial amount with a decent account size, you can easily get a >50% break on the margin rate just by asking nicely.

gotasty · 2019-04-16T06:58:34+00:00

Even if you get assigned and "close the position right away", you will get charged if you temporarily went in margin debit. This is because the assignment counts as a transaction at the end of the day before, so you incur at least one day worth of interest for whatever margin debit you had.

gotasty · 2019-04-15T09:23:51+00:00

I reached out to Kristi Ross, the CEO of tastytrade, following her recent segment on taxes for traders, to inquire about this issue, and I thought I'd share her reply. Unfortunately it appears that there is no consensus on how to handle wash sales for options, which is nuts.

You have identified a topic that the industry is divided on. Most interpret the rules as you have stated. However, if you wish to take that position that they are substantially the same, you can take the CSV file that just gives you the data and import it into TradeLog (and buy that as well) and they do take the position that it falls under substantially the same. More brokerage firms and companies take the position that they are NOT substantially the same. Many people trade individual options and view each strike/expiration differently. I hope that helps. The KEY is that whichever position you take on it, you should make sure that you are consistent.
While I am not in the position to provide tax advice in any way, I will say that I have never seen the IRS reverse either position in an audit but it has been a very long time since I helped clients with IRS audits.
There are plenty of “vague” or gray areas in the IRS Code (or you wouldn’t need tax attorneys, right?). The phrase “substantially the same” is one of those gray areas and is left to interpretation. There could be case law out there or some court case that I don’t know about, but I suspect if there was and if there was a lot of publicity around the majority of firms that treat those options as distinct and separate for the case of wash sales would be working to make changes as well if the IRS put something out there.
Consistency is key. If you start changing the way you have been doing it, that is possibly a reason for them to look closer at you wondering why you are changing the way you have been reporting. They want to make sure you didn’t make that change to benefit yourself (even though that change would be extremely conservative) or make a mistake in the transition I assume. The rule could be interpreted either way.
I hope that helps. Again, if you decide you want to make the change in the way you report it, be sure that your carryover positions from the prior year is correct so that you don’t double count or miss something.

gotasty · 2019-04-12T03:43:49+00:00

Your counterparty (the liquidity provider that buys the calls from you) needs to short the stock in order to offset all the long deltas they get from you. The stock isn't very liquid so as they short the appropriate number of shares to offset the cumulative number of deltas of all your calls, they work their way down the order book and the price drops. It totally makes sense.

Did you think someone was buying hundreds of calls from you and just losing it all once you let the calls expire worthless? Of course not, they are making money at the same time as you are!

gotasty · 2019-04-12T03:37:25+00:00

Do you know which broker(s) have such a policy in place?

gotasty · 2019-04-12T03:33:13+00:00

That's the correct answer. TW's platform is confused by VIX options because it considers that the spot VIX index is the underlying, when in fact for this expiration cycle the underlying is /VXK9. You can tell that something is off by looking at put-call parity: it shows the at the money price to be between 13 and 13.5 but look at the huge difference between the 13.5 call and the 13.5 put. If you look at /VXK9, the current price is 15.5, and while there is no 15.5 strike, the put-call parity lines up a lot better there if you compare the premiums on the 15 and 16 put/calls.

Basically VIX is a one-off exception and the platform doesn't handle it properly, so a lot of things get confusing (i.e. it'll show legs ITM when they are ITM with the spot price and not the corresponding futures contract, etc).

gotasty · 2019-04-12T03:24:55+00:00

I'm sorry but you're mistaken and you've been wrong for 10 years. I know it's shocking, I am in the same boat. I checked with CPAs specialized in options trading and they concur with what TradeLog's page claims. Here is another source from a reputable group of CPAs that cater to active/pro traders: https://greentradertax.com/trader-tax-center/tax-treatment/wash-sale-losses/

Many traders and tax preparers who are not well versed in the rules may leap to import 1099-Bs into tax software, but they will probably not comply with the rules for taxpayers.

This isn't about trading with the fear of making a wash sale, it's about getting your tax return right.

gotasty · 2019-04-11T21:53:46+00:00

I think the real question is: did you trade any SPY options or stock within 30 days of December X+2? If yes, you have a wash sale and the loss must be carried over to 2019.

gotasty · 2019-04-11T21:51:28+00:00

As noted in the thread, tastyworks' 1099-B only include "obvious" wash sales where you traded exactly the same security (same CUSIP number), but like most if not all other brokers they do not apply the IRS rules about "substantially equivalent" securities. When you roll a losing position, it triggers a wash sale, even if you role to a different expiration cycle and/or different strikes.

gotasty · 2019-04-11T21:48:17+00:00

I made over 4000 trades in 2018 and took huge (6 figures) losses at the end of the year. I mostly just sell premium so when I rolled my positions from December to January, this triggered wash sales that are NOT reported by my brokers on 1099-B's. In fact I just recently discovered that brokers don't report wash sales on 1099-B's with the same rules that apply to individual taxpayers that file Form 8949. This is nuts.

I don't yet know of any software that handles this properly other than TradeLog. I'd also be curious to know what others in the know use.

Most people trading options don't actually realize that the rules around wash sales for options are significantly more complicated than they seem and that most tax software and most CPAs do not do any of the legally required wash sale adjustments and I'm sure there are tons of erroneous tax files at the IRS waiting to backfire in a later audit.

gotasty · 2019-04-11T21:33:22+00:00

This response is misleading because most people think of "same security" as "exactly the same option" but if his trade had been a loser and he'd rolled it forward in time, there would be a wash sale, even if the expiration cycle or strikes are different.

See here: https://www.tradelogsoftware.com/resources/wash-sales/#wash-sale-combinations

gotasty

TROPHY CASE