Using Options to Avoid the Tax-Loss Wash

Turkey Day in More Than One Way

The last day to double up this year is Nov. 28 -- the day after Thanksgiving. You must then wait 31 days, or until Dec. 29, until you sell out the original shares to realize the tax loss. If you don't double up but simply sell the shares, you would need to wait another 31 days, or until Jan. 29, to avoid having any repurchase classified as a wash sale. Understand that doubling up also doubles your exposure to both profits and losses during the 31-day holding period.

Schwartz suggests using a long-term call or LEAPs options instead of buying more of the underlying shares. The main advantage of using options is that they not only reduce the risk during the holding period but are less costly in absolute dollars. "Options are cheaper in that, aside from currently being priced at historically low levels, their leverage allows you to double up with significantly less capital than purchasing actual stock," said Schwartz.

He points out that the loss of options' value due to time decay is less acute in longer-dated options and isn't a real issue until less than three months remains in the life of the contract. "Analysts who set price targets often allow 12 to 18 months to give stocks time to reach the goals," Schwartz said, "so why shouldn't call-buyers use those time frames?" That's another reason he prefers LEAPs over shorter-term options.

Few and Far Between

Of course, one drawback of buying calls, as opposed to actual shares, is that for companies paying a dividend, an option owner, unlike a shareholder, doesn't receive that payment. But Schwartz points out that some of this can be offset by collecting interest on the proceeds of the sale of the stock.

But the dividend variable doesn't look like it will create widespread concern. I ran a company screen with these basic criteria: a market cap greater than $500 million, a stock price above $20, an annual dividend of at least 2% and a stock decline of 10% or more over the last year. Only 15 names appeared:

Dividend-Paying Downers
Stock (symbol)	Price*	Dividend Yield	52-Week Return
Albermarle (ALB)	$26.87	2.1%	-10.04%
Alltel Corp. (AT)	44.25	3.3	-11.32
Amerada Hess (AHC)	44.08	2.5	-10.53
Avery Dennison (AVY)	52.40	2.8	-16.68
Bemis Co. (BMS)	45.06	2.5	-12.30
DTE Energy	36.38	5.7	-17.60
Deluxe Corp. (DLX)	38.90	3.8	-10.98
Eastman Kodak (EK)	24.34	2.1	-28.81
Kraft Food (KFT)	31.00	2.3	-18.42
Merck (MRK)	46.15	3.2	-19.89
Newell Rubbermaid (NWL)	22.25	3.8	-26.10
Sara Lee (SLE)	20.18	3.7	-12.08
Sonoco (SON)	21.10	4.0	-12.08
Verizon (VZ)	32.46	4.7	-14.56
*Closing price on 11/18/03 TSC Research

Search your own holdings during the next week to determine which stocks you'd like to jettison, which you want to hold, and those few in which it may pay to double up.