Robert G. Leslie and Marilyn B. Leslie - Page 8

                                        - 8 -                                         
          holder and thus is subject to the increased risk of being                   
          directly subject to the market.  To minimize this increased risk,           
          the holder would obtain a new position similar to the one in the            
          closed loss leg, except for a different month.  This substitution           
          of one position for a similar position in a different month                 
          (switching) of the loss leg in the initial year in order to                 
          generate a tax loss which is offset by the unrealized gain in the           
          other leg of the straddle is a pattern usually found in the                 
          trading of tax straddles.  Ewing v. Commissioner, 91 T.C. at 401.           
               A "butterfly spread" has three legs maturing at different              
          times.  If the first and third legs are long, then the middle               
          position is short.  If the first and third legs are short, then             
          the middle position is long.  The outlying positions (first and             
          third legs) are referred to as wings and the center position as             
          the body, hence the term "butterfly".                                       
               The center position or body of a butterfly spread is twice             
          as large as either wing, and the time periods for the delivery of           
          the commodity from the first wing to the body and from the body             
          to the second wing are equal.  Essentially, a butterfly spread              
          creates two spreads, one bullish and one bearish.  Thus, a                  
          butterfly spread presents less chance of either an adverse or a             
          favorable spread movement and is, therefore, less likely to                 
          result in a different loss or gain than an ordinary straddle.  An           
          example of a butterfly spread would be as follows:                          






Page:  Previous  1  2  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17  18  19  20  Next

Last modified: May 25, 2011