The options industry is attempting to stop a proposal that would tax most financial derivatives on a market-to-market basis, that values positions based on their fair value.
Reuters reports that the U.S. Securities Markets Coalition, which is composed of all eight exchange operators and the OCC, submitted a letter to Congress — arguing that the proposal made by congressman Dave Camp is “very damaging” to listed options, while undermining the point of using such derivatives.
Gary Katz, chief executive officer of the International Securities Exchange, told Reuters at the Options Industry Council conference in Las Vegas: “You come into the options market to hedge. This (the proposal) defeats the whole purpose of why you come into the options in the first place.”
The writing of the call options, according to Camp’s proposal, would be treated as if the related physical stock holding had been sold with gains and then markeked-to-market at the end of the year, and would apply even if the written call was still outstanding. Joseph Corcoran, vice president and head of government relations at OCC, said to Reuters: “The mixed straddle provision essentially treats you when you enter into a covered call transaction or protective put as if you sold the underlying stock position at that time.”
These strategies are used frequently in the options market — Individuals sell call options on a stock they hold in order to generate additional income from the premiums they receive for selling calls—which is referred to as selling “covered call options.”
Those individuals holding stock may buy a put option on the stock as insurance against a significant decline in the value of the stock, while the Camp proposal is intended for the so-called big players in the market like institutional investors. Analysts claim that it would hurt retail investors, who account for about 30 percent of entire options volume, according to OCC.