Lesson 15 of 25 · 7 min
Why some hedges reset a holding period and others do not
The clock can be paused or sent back to zero, and neither event shows up anywhere on a trade confirmation.
A holding period sounds like a fact about the calendar. In several systems it is a fact about risk, and it can be stopped or sent back to zero by a position opened somewhere else in the account.
The reasoning behind rules of this kind is consistent even where the mechanics differ. A characterisation earned by holding through time is understood to be earned by bearing the risk of that time. Remove the risk with an offsetting position and the days stop counting toward the characterisation, because the thing the days were measuring is no longer present.
Two mechanics appear. One suspends the clock: days while the offsetting position is open simply do not count, and the clock resumes where it stopped. The other restarts it: the count is reset to zero when the offsetting position is removed, and everything before it is discarded. Systems that have such rules at all differ on which mechanic applies, and often on which mechanic applies to which instrument.
Numbers make the gap obvious. Shares are acquired, a hedge is opened on day 194, closed on day 331, and the shares are disposed of on day 402. With no rule of this kind, the period is 402 days. Under a suspension mechanic it is 194 + (402 − 331) = 265 days. Under a restart mechanic it is 71 days. Against an assumed boundary of more than 365 days, only the first lands on the far side.
On a gain of $212,500, two assumed characterisations of 33 percent and 18 percent produce $70,125 and $38,250, a difference of $31,875 turning on which mechanic the system uses. Both percentages are assumptions of the example. Which mechanic, if any, reaches a particular holder is a question for their own adviser.
Key terms
- Suspension
- A mechanic under which days spent hedged do not count toward a holding period, while the days before and after still do.
- Restart
- A mechanic under which the holding period begins again from zero once the offsetting position is removed, discarding everything earlier.
- Offsetting position
- A position that substantially reduces the risk of holding another one. It is the trigger for both mechanics described here.
Worked example
One timeline, three counts
Shares acquired on day 0, hedged from day 194 to day 331, and disposed of on day 402. The boundary and both percentages are assumptions of the example.
- Count with no rule of this kind
- 402 days
- Count under a suspension mechanic
- 265 days
- Count under a restart mechanic
- 71 days
- Assumed boundary
- More than 365 days
- At an assumed 33 percent on a $212,500 gain
- $70,125
- At an assumed 18 percent on the same gain
- $38,250
194 + (402 − 331).
402 − 331.
Only the first count clears it.
A difference of $31,875.
One set of trades, three different answers to how long the shares were held. The trade confirmations are identical in all three.
Check yourself
Shares are held from day 0 to day 402 with a hedge open from day 194 to day 331. Under a suspension mechanic and a restart mechanic, how long were they held, and why does the gap matter?
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.