Tax Effects in Canadian Equity Option Markets
22 Pages Posted: 10 Aug 2017
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: Suggested Citation