- 15 -
The PPM further noted that upon a "closing transaction" any gain or
loss was to be treated as short-term capital gain or short-term
capital loss.
The Merit T-bond option market functioned similarly to the T-
bill option market. The T-bond trades also featured an open-
switch-close pattern. In the 1979 T-bond option market, there were
two trading sequences. In each, only three trading dates were
involved. The first occurred in the second week of December 1979,
when each investor opened a position by buying (or selling) an
option spread from a member of the other side. On December 28,
1979, every participant "switched" by buying or selling an option
that would offset the loss leg of the opening position. This
generated short-term capital losses for 1979. A few days later,
but in 1980, each investor would buy or sell an offsetting position
or allow the option to expire unexercised. For 1979, each T-bond
investor realized a short-term loss.
In 1980, the pattern shifted. Some trade sequences followed
the open-switch-close pattern, and others appeared to be selected
to generate long-term capital gains.
For each participant, the first taxable year of T-bond trading
produced substantial losses. Of the 25 accounts (other than Merit)
in the T-bond option market between 1979-81, 9 made profits,
generally in relatively small amounts.5
5 One notable exception was the case of Surya Trust. For
1979 through 1981, it posted T-bond option losses of $341,843 and
$9,474,174.71 and a gain of $10,042,498.97, respectively. Its
(continued...)
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