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This strategy reduced Tandrill’s overall potential for economic
profit or loss, but substantially increased its transactional costs.
We are convinced that Tandrill’s primary aim was to generate tax
benefits.
The tax-motivated nature of Tandrill’s futures straddles is
reflected in the timing of the transactions that closed out its
losses. For example, in 1979 the loss legs of the precious metals
straddles were closed out on dates of large price movements in the
underlying metals.41 The record indicates that in November 1979,
traders closed out their short silver positions and simultaneously
replaced them with other short silver positions. The sole
motivation of this strategy was to lock in a tax loss for 1979 and
to push the corresponding gain into 1980. This is precisely what
Tandrill did. Of the 721 silver contracts that it closed out in
1979, 718 were closed out either on November 21, 1979, or November
27, 1979, landmark dates for large price movements.
40(...continued)
futures straddles cleared through ACLI.
41 For instance, in November 1979, the price of silver
futures fluctuated far more than normal. This meant that for
traders holding silver spreads, both long and short legs
increased sharply in value, placing the long leg in a position
with a substantial profit and the short leg in a position with a
substantial loss. For tax-motivated individuals, this was the
optimal occasion to close out the loss leg, realizing the loss
for tax purposes, and to replace that position with another short
position comprising the same number of silver contracts
(typically with a delivery date late in 1980).
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