Options and Franking Credits

[apra143]

Had a few questions surrounding these 2 areas:

1. Do options that expire worthless become a capital loss?

2. Do options that are exercised on or before expire date become a capital gain (less the premium)?

3. Since I haven't executed my first trade yet; what is usually involved in exercising an option? i.e. Do most online brokers simply have a button that executes the transfer immediately?

4. After reading the following from the ASX site:
In order to claim an imputation credit you must be an Australian resident for tax purposes and you must satisfy the 'holding period rule' in respect of the shares. The holding period rule requires that you own the shares without a reduced risk of gains or losses from those shares (through hedging or other means) for 45 days.
Does this mean that if I bought shares in company XYZ followed immediately by a put option on company XYZ to reduce future losses (which may/may not expire worthless), I wouldn't qualilfy for franking credit offset come tax time?

Cheers.

 

[sails]

Had a few questions surrounding these 2 areas:

1. Do options that expire worthless become a capital loss?

2. Do options that are exercised on or before expire date become a capital gain (less the premium)?

3. Since I haven't executed my first trade yet; what is usually involved in exercising an option? i.e. Do most online brokers simply have a button that executes the transfer immediately?

4. After reading the following from the ASX site:
In order to claim an imputation credit you must be an Australian resident for tax purposes and you must satisfy the 'holding period rule' in respect of the shares. The holding period rule requires that you own the shares without a reduced risk of gains or losses from those shares (through hedging or other means) for 45 days.
Does this mean that if I bought shares in company XYZ followed immediately by a put option on company XYZ to reduce future losses (which may/may not expire worthless), I wouldn't qualilfy for franking credit offset come tax time?

Cheers.

Hi Apra, honestly, these are questions best put to your accountant or broker where relevant as individual circumstances can differ. The answers may also depend whether you are considered a trader or investor with the ATO.

My understanding of Q1 & 2 is that options are not treated in the same way as shares when it comes to capital gains or losses. That said, it can become more complicated when options are exercised or assigned resulting in a share transaction. But as I'm not an accountant, don't take my word for it - please check it out with someone qualified to give such advice for your personal circumstances!

Q3. Exercising an option varies between brokers. Some have a button, some require an email or phonecall. If I am doing the exercising (as opposed to being "assigned" where I do not control the time of assignment), I make sure I have confirmation that the order has been received. Especially true if exercising long ITM calls the day before ex-div. where it must be done that day.

Other things to find out from your broker is:
1. How much do they charge for exercise/assignment of the option.
2. How much do they charge for the resulting share transaction.
3. Do they charge any excess fees such as fail fees if there are insufficient funds in the account.
4. How much time do they give you to cover the share position the next day. Some brokers have deadlines and, if that is not met, they will take the matter into their own hands .

There are option brokers who will charge very reasonable fees for option exercise/assignment and the subsequent share transaction and who don't charge fail fees. Others are unbelievably expensive, so it pays to shop around for an option broker who has favourable conditions if you think exercise/assignment could be an issue for you.

Q4. Definately another question for your accountant. By memory, I think those rules may not apply if the franking credits are less than $5000 PA per entity or something along those lines. But again, I'm no expert or authority on ATO issues, so can't stress enough that you need to get professional advice on all these questions.

Cheers

 

[apra143]

Thanks Sails. Haven't actually committed any money so far - just reading up as much as possible - but found some areas regarding Options and Franking credits a little "grey" for my liking.

Still a full-time uni student only working part-time occassionaly but qualify for tax free threshold, so no need for an accountant at this stage.

Perhaps these question are less begginers questions and more suited to the trading derivatives sub-forum....