Leema Enterprises, Inc. - Page 13




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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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