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Merit initially organized its option customers into two
groups--the A side and the B side. Members of the A side traded
only with members of the B side, and vice versa.
Almost all of the trades for the 1979-80 tax year demonstrate
what has been called an open-switch-close pattern. Six sets of
orchestrated trades or trading sequences took place in the 1979
Merit T-bill option market. In each of these sequences, only 3
trading days were involved. The first occurred in the second week
of December 1979, when all the investors "opened" a position by
buying or selling an option spread from members of the other side.
On December 28, 1979, all participants "switched" by buying or
selling options that would offset the loss legs of their opening
positions. In so doing, every investor in the T-bill program
incurred a loss that was an ordinary loss for tax purposes.
Then, on January 4, 1980, in the subsequent taxable year, the
investors acquired offsetting positions to close out their gain
legs--or they allowed their options to expire unexercised. They
incurred gains that approximated their taxable losses incurred a
few days earlier, in the prior taxable year.
In 1980-81, trading in the Merit T-bill accounts was slightly
more complex, but 23 of 27 trading sequences followed the open-
switch-close pattern which took place shortly before and shortly
after the end of the investors' taxable years.
(...continued)
figured in, he ended up with an overall economic loss of $205,930
in the trade sequence.
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