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So you prefer options to futures?

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Trading futures of course has tax advantages over trading stocks or options on equities. Though there are exceptions, most individual stock options we trade will be taxed 100% at your short-term tax rate as ordinary income. ... With index options, you'd pay 35% on 40% of the gains and 15% on 60% of the gains an effective tax rate of about 23%. Your broker will report the aggregate profit or loss on contracts using a simple one-page 1099-B. That means the form does not report every single trade, but instead the aggregate of all trades made in each individual index product. For example, if we traded five times in the S&P 500 contract, all those trades would be aggregated to show you what we gained or lost in trading that contract during the course of the entire year. Simple, right? Youll then report your gains on IRS Form 6781 Part 1, which breaks down the gains into the aforementioned 60/40 split. Lastly, those amounts move to the Schedule D capital gains and losses.

Index options have an unusual and less-used feature called a loss carryback election. This allows you to carry back losses up to 3 years to offset any gain you made in Section 1256 contracts in those years. Any unused losses can then be carried forward.

Wait just a second, this isnt a post for tax planning but an actual trade idea that shows you how to net about 2K in a day by trading the tax-advantaged index options with say a 20K account.

So Step # 1 in this process is to clearly identify which of the indices are trending, which in itself, sometimes becomes a daunting task when the broad market (yes, the S&P) begins to trade in a 10-point range all-day, trendless and without purpose. For our specific example and for our actual trade from this past Wednesday, we were quick to identify that the Russell Index which was very sluggish while the rest of the markets were rallying in the past week or more, was sooner or later going to catch up with the fast-moving stocks of the larger indices. This actually occurred earlier in the week, so we picked the index associated with the Russell RUT versus trading options on an ETF like IWM which is associated with the Russell. This is the type of trader for the individual who has a regular day time job or business to attend to and is unable to trade futures actively. At TradeGuidance, we help identify such opportunities virtually each day. We couldve picked an option that was closer in expiration, but preferred a near money trade that gave us more time in the event there were drastic price changes in the indices. Step # 2 is to identify accurately and pick the right options trade. Step # 3 is the execution which is simple. We traded 10 options contracts given the 20K constraints of the account size and the transactional extract from the trading platform and the brokerage portal are shown here below:

Thinkorswim transactions export


TDAmeritrade portal transactions summary


If you like what we do, come visit us at and fill out a contact form and tell us what you like trading and how you did if you actually took trades from our ideas. Follow us on twitter @tradeguidance where most of our promotional posts go out as well.

Risk Disclosure: Futures, forex, currencies and stock/options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results. Past Performance Disclosure: Past performance results have many inherent limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between actively monitored performance results and the actual results subsequently achieved by anyone using any traders newsletter service . There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of actual or simulated performance results and all which can adversely affect trading results. Although, TradeGuidance never presents hypothetical or simulated trade results, all trades presented can be in a simulated using back-testing to demonstrate similar results.

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About the author

Murali Sarma, Vice President of Business Integrations Inc., is an internationally known commodities analyst, author, trader and business consultant who has demystified commodity trading and introduced numerous futures trading strategies and indicators to traders - professional, non-professional and the novice trader - throughout the world. Murali began his trading career in the pre-dot-com bubble in 1998, electing to seek instruments to trade which had lesser volatility and offered more predictable analysis. From about 1999 to 2002, Murali traded out of the UK and moving to the US after that and working mostly independently with individual traders while learning from some of the best analysts and traders. While not being formally certified as a commodities trader, Murali preferred to hone in on his analysis and trading skills versus adding academically to his credentials. Murali believes that is isn’t about being right or wrong on your calls, it is about making money!

Murali has helped several traders become successful over the last 10+ years of active futures trading and has a strong following of traders who like to seek out opportunities in the futures markets on a daily basis versus following the old “buy & hold” investing adage. While not being opposed to switching hats and becoming an “investor” every so often with swing trades in the equities markets, Murali prefers to trade what he can see on charts using multiple timeframes and handcrafted indicators suited for all types of markets. Murali excels in trading sideways and choppy markets with a scalping style of being in-out of intraday markets when there is no defined trend, and on most other days prefers trading to his own computed target levels during the intraday timeframe, while following the trend.

In recent months, Murali has started a Twitter based alert service for intraday futures traders who like to trade commodities and index futures, and elected to blog post his daily analysis in commodities like WTI Crude & Gold and index future instruments like YM, NQ, ES & RTY. You may contact him via his email at

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