Bought DRYS Call Options to Avoid Wash Rule

Dry Ships, Inc (DRYS) has been killing me.  I own 400 shares with an average cost of $43.47 not counting the premiums I’ve taken in since I started off with a DRYS naked put back in June.  I have two naked puts expiring today that will assign me 200 more shares at $17.50.  That will bring my average cost down to $34.81.  DRYS was up at $84.35 only a little more than five months ago.  This morning it hit $3.33.  (No, I’m not missing a digit.)  I still think DRYS can recover eventually, but also know I’m sitting on a $16,000 paper loss on the first 400 shares. Not counting the naked puts which will add another $2800.

I thought about buying 600 more shares to bring my average cost down towards $19, but saw that the call options offered a cheaper alternative.  While DRYS was trading at $3.53, I bought to open six DRYS June 2009 $2.50 calls at $2.25 each and paid $1,364.49 with commissions.  Spending another $1,300+ on a dog might not be the smartest move I’ve made, but it’s a hard battle to find the stupidest move I’ve made this year.  I didn’t consider selling all 600 shares right now because I only have a value around $2,100 right now and that’s such a drop in the bucket compared to the damage I’ve already had that I’ll accept that risk for the potential reward.

My theory is that by buying those calls today I can sell the 600 shares I own at the end of December and I’ll be able to write-off the loss for taxes, avoid the wash rule and yet I’ll still have upside potential for six more months with the calls I bought in the money.  I could’ve bought the shares for only $1.28 more, but I like the idea of saving that $750+ even though my option has an expiration date and the shares don’t.  Also, if DRYS isn’t up by June 2009 this move will force my hand to get out completely.  I think it will either be up above $25 by then or will be bankrupt and my calls will be worthless.

The goal on this trade completely revolved around the wash rule though.  To avoid the wash rule you cannot buy a “substantially identical” stock or security within 30 days before or after you take a loss sale or the tax loss is disallowed.  Most investors think they can get around this rule with options.  It’s debatable, so I avoid the risk and keep my loss trades cushioned by 30 days on option trades.  I’d hate not to be able to write off my massive upcoming loss on DRYS.  You never know, I could luck out and DRYS not only stays alive, but also rallies big before the end of December and I get to “win” on both stocks.  I can dream can’t I?