Hi Kris.

Boy, this board has been dead lately. I hope that M* has some more articles so that we can get some discussion lately.

Let me try to address your questions:

1) If you are long a LEAPS call and your holding period is more than a year, then it is treated just like a stock trade. Gains and losses would be long term. However, there are more complicated rules for being short LEAPS, such as covered calls. For instance, you cannot claim a long term gain through the opening and closing transactions of a LEAPS covered call.... any gains are short term regardless of the holding period. Also, if you open a covered write with a strike that is deep in the money, that affects the holding period of the stock itself. OTM writes, when initiated, do not affect the holding period of the stock. I am not a tax expert, so before making assumptions on your tax return, consult the IRS guide.

2) I generally do not short stocks, so you may want to ask the experts in the stock forum or Hands On forum. But basically, you need a margin account because your broker must find shares of the stock to borrow and put the shares into your account, where they are immediately sold at the current market price. The goal is to purchase the stock again at a lower price and pocket the difference. After you buy the stock again, the shares are returned to the broker and the transaction is finished. If you carry a margin balance during all of this, you are responsible for the interest accrued on your account. Also, you are responsible for paying out any dividends that the stock generates. So instead of a positive cash flow with dividends, the dividends produce a negative cash flow. So the stock price has to decline enough such that you can recover all of these costs. I am not aware of any time restriction on shorting stocks, but most investors have a relatively short time frame because of costs and the tendency of the markets to go up in the long run. A short position should be carefully monitored because if the stock price goes too high, you would be buying back shares at a higher price, and that would cause a loss in the strategy. Also, if the stock price increases substantially, you may be faced with a margin call from your broker. So all of those risks needs to be evaluated.

Steve