As a follow up to yesterday’s question, here is your question PLUS answer and rationale:
Question (Relevant to Series 7, Series 62, and Series 24):
Sam bought 1,000 shares of XYZ Corporation three months ago and the stock has appreciated significantly over that time. Sam decides to go short against the box. What does this mean?
A: Sam has decided to short 1,000 shares of XYZ.
B: Sam has decided to write 10 call options of XYZ stock.
C: Sam has decided to write 10 put options of XYZ stock.
D: Sam has decided to sell his shares of XYZ and then buy the shares back after a 30-day window.
Correct Answer: A
When an investor goes short “against the box” it simply means that the investor has shorted shares that they already own with no intention of delivering their own shares by the settlement date. This practice is called “against the box” because the owned shares are held safely in a box, while borrowed shares are sold. Shorting against the box used to be a common tax deferral strategy. By selling borrowed shares, the investor could defer a capital gain to a more favorable later time. Current tax law no longer permits shorting against the box to be used as a tax deferral strategy – when an investor shorts shares they already own it is treated as if they have sold the shares and the gain is recognized immediately.
*Questions featured in the weekly study question series are sampled from Solomon’s industry-leading Online Exam Simulator.