<p>An investor has capital-gains income from a sold-off stock position. Separately, the investor has other shares that are down an equal amount; if he sold them he'd realize a loss to offset the gains and pay no taxes. But no one likes to sell low. So he wants to use that loss without actually selling the shares. IRS rules prohibit investors from taking a loss against a gain and then buying the shares back within 30 days.</p>
                <p>1. At least 31 days before the planned sale, the investor buys an equal value of additional shares of the underwater stock.</p>
                <p>2. The investor buys a "put" option on the new shares at their current price, and sells a "call" option. Now he's protected from the downside on that second purchase.</p>
                <p>3. At least 31 days later, the investor sells the first block of underwater shares. He now has his tax loss, without having taken any additional downside risk from the purchase of the second block of shares.</p>
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