Investment Strategy Under the New Tax Bill
Congress has now passed the new tax bill which extends the Bush-era tax cuts until 2012. The question forward looking investors should ask is how to trade this significant change.
At first blush, it may not seem like a change at all. For the most part, these are extensions of existing tax law and have simply been allowed to continue. But there is a new provision in the law that allows businesses to write off 100% of equipment purchases between now and the end of 2011.
That provision should benefit capital equipment makers such as Dell (DELL) - Get Report because businesses will be able to accelerate their write offs into the front end and thus have a greater incentive to buy before the end of 2011. A fairly conservative way to invest in DELL with limited risk would be a vertical call spread.
Trades: Buy to open DELL May 13 calls for $1.29 and sell to open DELL May 14 calls at $0.83.
The net debit is $0.46 and the risk is strictly limited to this amount. Compare this to an investment in the stock at the current price of $13.33. In contrast, the option strategy could more than double on any stock move above $14.00.
At the time of publication, Phil McDonnell held no positions in the stocks or issues mentioned.
Phil is a professional options trader and contributes regular commentary to the Daily Speculations web site. Prior to trading professionally, Phil was a software developer for Dollar/Soft, a financial software company specializing in options software for equities, indexes and futures. He also wrote the book, Optimal Portfolio Modeling, which was published by Wiley Trading in February 2008.
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