Author Topic: DISCA/DISCK - Discovery Communications  (Read 80677 times)

Munger_Disciple

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Re: DISCA/DISCK - Discovery Communications
« Reply #210 on: November 24, 2019, 08:27:08 AM »

You always amazed me Munger. I believe you nailed it. He kept mentioning that every move he made are related to his estate planning and not related to specific companies economic.

Thanks for your kind comments undervalued! Much appreciated.


Munger_Disciple

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Re: DISCA/DISCK - Discovery Communications
« Reply #211 on: November 24, 2019, 08:27:51 AM »
Also why does a collar help with taxes if he passes away?  His heirs presumably get to step-up the basis of the common stock.

wabuffo

My guess is and perhaps this is what Munger is getting at is that he probably wants to sell Discovery now, but that would trigger taxes.  So he buys long dated options to lock in his gains in the hopes that when he dies his heirs will get to step up their basis and be able to sell without triggering taxes. 

Exactly

Munger_Disciple

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Re: DISCA/DISCK - Discovery Communications
« Reply #212 on: November 24, 2019, 08:54:33 AM »

In any case, the loss from the call (assuming stock goes way past $35) will offset the gain from the stock and his effective sale price will only be $35 at expiration.

Yes - but that's pre-tax.  Malone laid out cash for the common stock.  He laid out no net cash for the options - but he generates a tax loss at expiry (again assuming DISCK is higher at expiry of the options).  The after-tax benefit of that gives him a higher tax-adjusted cap than the strike of the call. Plus, he doesn't just generate a tax loss from the calls, he also creates a loss from the puts he "bought" which expire worthless.

As I said before, since European style options are more expensive than American style options for the same seven-and-a-half year duration (because European options can only settle at expiry while American options can be exercised throughout the duration), these losses on the collar might create relatively large tax losses for Malone relative the underlying common position he purchased.

I'm not saying he didn't give up something - but he gave his reasons for why he executed this transaction.

wabuffo

I guess I don't understand your comments related to tax loss from collar and the benefit to Malone at expiration above the strike price. I don't believe it is correct. Let me explain my reasoning.

The cashless collar consists of a short call with strike of $35 and long put @25. Let us further assume that Malone collected a premium (today) of $5 for sale of the call and paid back the $5 to buy the corresponding put, thus resulting in a cashless transaction.

Now let us fast forward to expiration date and assume that DISCK is trading at $50 per share. Malone's shares get called. He delivers the shares and gets paid $35 per share. In total he collected $40 per share including the $5 premium. Assuming his cost basis for the DISCK shares is (for example) $25 per share, his capital gain related to call portion of the transaction is $15 per share. In addition his long put expires worthless and therefore his loss related to the put is $5 per share which he deducts from $15 gain and the net capital gain to him at expiration is $10 per share. And this capital gain is identical to the gain if he sold the stock for $35 per share w/o any collar transaction.

MD