The Striking Price
Doubling Up Your Portfolio Losers
As investors reposition their year-end portfolios, they should consider a technique for extracting value for good stocks having a bad year.
By STEVEN M. SEARS
It has been a strange two weeks, regardless of your political views. Half of the U.S. believes that Donald J. Trump’s surprise election as president heralds a brighter future and the rest are convinced that a dark age has descended upon the nation.
The stock market has nonetheless rallied higher, defying Wall Street’s prognosticators who predicted an extraordinary decline if the real estate tycoon managed to beat Hillary Clinton. So many investors are now preoccupied with repositioning their portfolios that it is easy to forget that Nov. 29 is the deadline for “doubling up” on stocks that have had a bad year, but may have a bright future.
This portfolio management strategy lets investors reset at a lower price the cost basis of stocks they want to keep. They also get to record a loss for tax purposes. If that sounds like a chance to have your cake and eat it too—it is. The double-up approach is allowed by the Internal Revenue Service, provided a few rules are followed.
FIRST, WE’LL DEFINE the mechanics of the trade and then offer a real world example. After reviewing your stock portfolio, let’s say you found some stocks that you want to keep even though the prices are sharply lower than when you bought them. While the best response was selling the stocks before they really tanked, you made a mistake, and you’ve managed to lose some money. Yet, you still think that the stock’s investment theme remains intact, or that the market mob has become too negative.
To double up, you simply buy more of the fallen stock. If you own 1,000 shares at $60, you buy another 1,000 shares at say $30. You then hold both positions for at least 31 days. On the 31st day, you sell the stock bought at $60. The 31-day period is critical. If you sell before that time, you violate the IRS “wash-sale rule” and you won’t be able to write off the $30 loss.
When double-up candidates are particularly problematic—that is to say there’s a lot of risk and potential volatility—doubling up with options can be more attractive than with stock. Call options, of course, cost less than buying the equivalent amount of stock, which means you control the same amount of stock with less risk. A drawback to options is that you do not collect dividends, but that’s a minor issue in this context.
“It’s hard to double up when a stock is hitting new lows. That’s when long-term options can make sense,” says Michael Schwartz, Oppenheimer & Co.’s chief options strategist.
Consider Teva Pharmaceuticals (ticker: TEVA). The stock started the year around $66, and was recently trading at about $37 after reporting tepid forward financial guidance. Yet, many investors own the stock, and consider it a key way to participate in the generic-drug industry. Still, the stock is problematic. The company was recently caught up in a Justice Department investigation into alleged price fixing with Mylan (MYL) and Endo Pharmaceuticals (ENDP).
With the stock at $37.82, investors would buy Teva’s January 40 call that expires in 2018 for $3.85. This long-dated call is a proxy for stock. Because it expires in a year, any profits will be taxed as long-term capital gains. Should the stock rally above $48, investors will double their money. If the stock is below the strike price at expiration, the trade fails.
EVEN IF YOU decide against doubling up, rechecking the cost basis of positions and reviewing investment themes should be part of your portfolio-curating discipline. Besides, presidents come and go, but taxes are forever, and doing whatever you can do minimize the bite is something President-elect Trump surely endorses.
Reprinted by permission of Barron's Online, © 2016 Dow Jones & Company, Inc. All Rights Reserved Worldwide.
The views expressed in the above papers and articles are solely those of the author of the article, and do not necessarily reflect the views of OIC; the information presented is not intended to constitute investment advice or recommendations to purchase or sell securities of any company; and the information presented is based upon particular events that may or may not recur in the future.
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