Tax Effects in Canadian Equity Option Markets

22 Pages Posted: 10 Aug 2017

See all articles by Moshe A. Milevsky

Moshe A. Milevsky

York University - Schulich School of Business

Eliezer Z. Prisman

York University - Schulich School of Business

Date Written: 1997

Abstract

The Canadian Income Tax Act induces individual investors to close their short equity option positions at the end of the year and, if necessary, reopen them at the beginning of next year. This article analyzes the conditions under which it is optimal to close or leave open a short option position over the tax year boundary. The analysis shows that the latter decision depends on transaction costs, the investor’s marginal tax rate, the interest rates, the initial and end-of-the-year option prices, as well as whether the option position is naked or covered. The article also examines the impact of tax regulations in Canada on the pricing of naked vs. covered call options and American vs. European options.

Keywords: Derivative Securities, Equity Options, Open Interest, Tax Arbitrage

JEL Classification: G13, H21, K34

Suggested Citation

Milevsky, Moshe Arye and Prisman, Eliezer Z., Tax Effects in Canadian Equity Option Markets (1997). Multinational Finance Journal, Vol. 1, No. 2, p. 101-122, 1997, Available at SSRN: https://ssrn.com/abstract=2631564

Moshe Arye Milevsky (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Eliezer Z. Prisman

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
(416) 736-2100 ext. 77948 (Phone)
(416) 736-5687 (Fax)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
75
Abstract Views
542
Rank
571,914
PlumX Metrics