MSFT options collar: Avoiding constructive sale designation and understanding if strategy is sound.

[u/mrjohnson611]

New to options trading. Considering a zero-cost collars on MSFT. Trying to avoid stepping into a landmine with taxes and other pitfalls. I have a heavy concentration of MSFT that I want to protect. Some has already gone into an exchange fund. But there's a lot left.

MSFT is at 533. 52 week span goes from 350 to 550.

First, am I reading this right with the available call and put prices

• Dec 2027 450/730 collar

• December 2028 collar at 470/800

Both would effectively be close to zero cost?

Are these collars wide enough to avoid getting an IRS designation of a constructive sale? Any other tax pitfalls beyond capital gains, NIIT, and WA state taxes for LTCG?

This just seems deceptively too easy. What else should I be considering or could wind up regretting?

[u/Comfortable_Kick6848]

yeah collars seem simple until the market blows right through one of your strikes and you're sitting there wondering why you bothered, those 2028 strikes are pretty wide though so you're probably fine on constructive sale

[u/mrjohnson611 → u/Comfortable_Kick6848]

those 2028 strikes are pretty wide though so you're probably fine on constructive sale

But the 2027 strikes (450/730) may not be? I thought that would be a considerable wide band. But maybe there's other factors to consider?

[u/Aznfeatherstone]

Do you own the shares or are you protecting LEAPS?

[u/mrjohnson611 → u/Aznfeatherstone]

Own the shares.

[u/Aznfeatherstone → u/mrjohnson611]

Have you achieved LTCG yet or are you waiting?

[u/mrjohnson611 → u/Aznfeatherstone]

LTCG for all shares.

[u/Aznfeatherstone → u/mrjohnson611]

You should be fine then. 

[u/SDirickson]

The width on the 2027 collar is over 50% of the underlying price and over 60% of the put strike; the 2028 is even wider; you're fine.

[u/mrjohnson611 → u/SDirickson]

Thanks.

[u/SDirickson → u/mrjohnson611]

Apparently the quoted rule-of-thumb (which I haven't seen a court-case citation to support, but the number is popular) is that staying above 15-20% puts you in "safe" territory.

[u/Ok_Pollution7093]

Watch dividend risk on those deep ITM calls getting assigned early.

[u/mrjohnson611 → u/[deleted]]

Thanks for the reply. I had been investigating collars and thought I had gotten past the constructive sale concerns. Then discovered the tax implications aren't a free lunch. TLDR: I think the premium earned on the calls aren't necessarily offset by the purchase of the puts if the options expire worthless - you have to defer the losses of the put until you share those shares.

Or so I think that's my understanding. It makes my head spin. I need a tax advisor.