Volume 1, Number 2 / June , Pages 93-168
Tax Effects in Canadian Equity Option Markets
Multinational Finance Journal, 1997, vol. 1, no. 2, pp. 101-122
Moshe Arye Milevsky , York University, Canada    Corresponding Author
Eliezer Z. Prisman , York University, Canada

The Canadian Income Tax Act induces individual investors to close their short equity option positions at the end of the year and, if necessary, reopen them at the beginning of next year. This article analyzes the conditions under which it is optimal to close or leave open a short option position over the tax year boundary. The analysis shows that the latter decision depends on transaction costs, the investor’s marginal tax rate, the interest rates, the initial and end-of-the-year option prices, as well as whether the option position is naked or covered. The article also examines the impact of tax regulations in Canada on the pricing of naked vs. covered call options and American vs. European options.

Keywords : derivative securities, equity options, open interest, tax arbitrage
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