Selling Losing Stocks Can Lower Your Taxes. Using Options Is a Less Risky Way to Buy Them Back.

Articles From: Barron's
Website: Barron's

One of the most fascinating attributes of investing is that active participants must constantly adjust their focus to identify emerging opportunities and risks. This challenge makes investing like playing a perpetual game of intellectual football, and it is why so many skilled practitioners humbly refer to themselves as students—rather than masters—of the markets.

As the 2022 investment year nears its end, opportunities to make money often seem elusive. Most investors are hypnotized by forces that are beyond their control, including what the Federal Reserve might do with interest rates to control rampant inflation. But there is one critical step that all investors can take before Nov. 29 to realize tax losses.

In this column, we’ve presented strategies to hedge portfolios, generate income off battered stocks, buy stocks for less than they are trading at, and even short entire sectors to monetize themes like people struggling to buy food. We have also highlighted stocks, such as American Express (ticker: AXP), that seemed to have merit but whose price has sharply declined.

We have championed AmEx as a worthy long-term investment that could benefit from a rebound in travel—yet the stock has been hit hard. Shares are down some 17% over the past 12 months. Still, it is difficult to imagine that the pressures that are now bullying the stock market—rising rates and a slowing economy—won’t diminish over the next year or so.

Anyone who bought American Express stock at higher prices—its 52-week high is $199.55—can consider the “double up” tax strategy to lower their cost basis.

The traditional way to double up is to buy a matching stock position at the current lower stock price and to wait 30 days. Once the period has passed, sell the shares with the higher cost basis, enabling you to realize a loss on the position. That loss can be used to offset gains elsewhere.

The waiting period is critical. If the initial stock is sold before 30 days have passed, investors violate the Internal Revenue Service’s wash-sale rule, in which case the loss isn’t allowed. Check with your accountant on this.

“Be mindful of time, and try to use time to your advantage,” says Michael Schwartz, Oppenheimer’s chief options strategist.

Many investors double up with stock. But call options—which give holders the right to buy a security at a specific price and date—offer similar exposure. The call lets investors benefit from the stock’s appreciation without putting a lot of money at risk. Calls always cost a fraction of the price of the underlying stock, though if the stock pays a dividend, call holders don’t collect it.

AmEx’s January $145 call that expires in 2024 costs about $2,400 a contract, which is a lot less than the more than $14,350 needed to buy 100 shares at their current price of $143.50. (An options contract represents 100 shares of stock.)

Should the stock recover and hit, say, $200 by the Jan. 19, 2024, expiration, each call contract would be worth $5,500.

The risk to doubling up on American Express, or any other stock, is that the stock could continue to weaken. Anyone who reiterates the position—with calls or with shares—could be putting good money after bad.

It is easy to extol AmEx’s virtues and the hold the company has on wealthy people, but it is hard to avoid the fact that the stock has behaved poorly this year.

The use of call options reduces the amount of money that an investor has at risk. Losing money on options doesn’t really feel much better than losing money on stocks—the amount is just less.

Originally Posted November 3, 2022 – Selling Losing Stocks Can Lower Your Taxes. Using Options Is a Less Risky Way to Buy Them Back.

Updated Nov. 3, 2022 9:45 am ET / Original Nov. 3, 2022 2:00 am ET

Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in the story.

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