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Hi ERN,
Great blog! I've been doing some DD to assess adding options to my portfolio. As a Canadian, we're quite tax-disadvantaged for options. In most cases, gains/loss from naked options are considered income. Given your short put returns experience, if you were hypothetically subject to a 48% marginal tax rate on premiums, and in the alternative had a 24% marginal rate on capital gains when realized, would you be likely to run your short puts or does this kill the deal and you'd just buy/hold SPY?
Comments from any Canadians following along are welcome also.
Thanks!
My take is 48% loss on all gains is a killer, but what happens to your rate in retirement?
My current blended tax rate on put selling plus muni income is around 15% (state + Fed), which certainly hurts a bit. However, learning the process is my goal at this point, and seems taxes in retirement are near zero.
Assume 900k taxable account and selling puts with 5.5% gain and 2.85 leverage. You make 140k on raw put sells that leads to about 70k after 50% for losses.
60% LT Cap Gain = 42k
40% ST Cap Gain = 28k
Muni funds/ETF (say 3% of 800k) = 24k
Very low taxes on 94k of income, so likely room for some Roth Conversions to prevent RMDs in the future.
I adjust my leverage to take into account the tax drag. Define your after-tax return target. Scale up your leverage to 1/(1-tax) to get there.
Similar intuition as this post: https://earlyretirementnow.com/2016/06/07/synthetic-roth-ira/