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Date:   Tue, 19 Dec 2006
From:   Timothy

Great site loaded with helpful info!

I am interested in the viability of buying puts in the open market to hedge unexercised ISOs. Consequences?

Thanks,
Timothy, CFA

Answer

Date:   Fri, 29 Dec 2006

Hello Timothy,

When you buy a put as an offsetting position to stock, short sale rules apply that erase the holding period when the stock hasn't met the holding period requirements for long-term capital gains. (Internal Revenue Code Section 1233(b), Revenue Ruling 78-182.) Therefore, offsetting puts should be used carefully, with the awareness that the holding period "clock" for the stock doesn't start until the put is eliminated.

An alternative approach is to buy a put for a stock that has a similar stock price movement to the ISO stock. An example might be to buy a put for AMD stock as a hedge for Intel ISO stock.

Employees should also check for "insider" restrictions prohibiting them from getting hedge positions against company stock.

Good luck!

Mike Gray

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.