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18.30. Tax Risk

Income on options on individual stocks will generally not be recognized by the Investment Compartment for tax purposes until an option is exercised, lapses or is subject to a “closing transaction” (as defined by applicable regulations) pursuant to which the Investment Compartment’s obligations with respect to the option are otherwise terminated. If the option lapses without exercise or is otherwise subject to a closing transaction, the premiums received by the Investment Compartment from the writing of such options will generally be characterized as short-term capital gain. If an option written by the Investment Compartment is exercised, the Investment Compartment may recognize taxable gain depending on the exercise price of the option, the option premium, and the tax basis of the security underlying the option. The character of any gain on the sale of the underlying security as short-term or long-term capital gain will depend on the holding period of the Investment Compartment in the underlying security. In general, distributions received by unit-holders of the Investment Compartment that are attributable to short-term capital gains recognized by the Investment Compartment from its option writing activities will be taxed to such shareholders as ordinary income and will not be eligible for the reduced tax rate applicable to qualified dividend income.

As a result, the Investment Compartment will generally recognize gain or loss on the last day of each taxable year equal to the difference between the value of the option on that date and the adjusted basis of the option. The adjusted basis of the option will consequently be increased by such gain or decreased by such loss. Any gain or loss with respect to options on indices and sectors will be treated as short-term capital gain or loss to the extent of 40% of such gain or loss and long-term capital gain or loss to the extent of 60% of such gain or loss. Because the mark-to-market rules may cause the Investment Compartment to recognize gain in advance of the receipt of cash, the Investment Compartment may be required to dispose of investments in order to meet its distribution requirements.