Creating the Long Account

• Trading two accounts creates potential tax advantages and offers the opportunity for gains of both a short- and long-term nature. This strategy requires the trader to set up two accounts with two slightly different titles. For example, take the account of John Smith and John J. Smith. Preferably the account will be open with two different brokers to further differentiate the accounts. The object of the strategy is to find a stock worthy of purchase on a long-term basis. It should be a stock that the trader will be content to hold even during market recessions and pullbacks. The trader is buying the stock of a high-quality, high-volatility company that regularly offers the opportunity to trade short-term dips. In the first account, the trader buys the stock of the target company.
  
  

Function of the Second Account

• The second account is used to countertrade the same stock from the first account. This is also called "fading" a stock. There are several ways to countertrade the first account. During periods of rising stock prices, the trader could sell puts in the stock. Selling puts of a company rising in price means that the puts will not be exercised and the entire premium will fall to the trader. Another strategy is to buy more of the stock and ride the market rise in both accounts. A third strategy is to short a similar but weaker stock. Thus the first position is hedged and the trader profits by the net difference in the performance of the two stocks. He is further aided because the trader only pays long-term capital gains on the first account and realizes short-term losses on the second, which provides a more valuable loss.
  
  

Trading and Tax Advantages of Two Accounts

• By holding the long position in one account, the stock will eventually become a long-term asset subject to long-term capital gains. In the second account, the traders actions will result in effectively having the first stock hedged as described in Section 2, or the stock can be shorted during market instability, creating short-term gains. If the trader is wrong in the actions he takes in the second account when trading the same stock, the trader will not be subject to "wash rules," which prevent an individual from taking a loss in a stock that is repurchased in 30 days. This is the primary reason for differentiating the two accounts with slightly different titles.