Looking to Lower Your Tax Bill? Consider This Options Strategy.

Chipotle recently approved a $500 million stock buyback, but investors remain concerned about weak earnings and high valuations. (Brandon Bell/Getty Images)

Financially savvy people with substantial wealth ultimately discover that managing tax liabilities is as important—and maybe even more so—than making money.

By proactively managing taxes, it is possible to reduce the amount of money paid to the U.S. government, which, of course, increases the amount of money that one keeps. This is why sophisticated investors rely on financial advisors, accountants, and tax lawyers, who often work in concert.

Aside from generation-skipping trusts and other estate-planning tools that shield a family’s hard-earned assets, there is a simple strategy that anyone can and should use each year: doubling down on high-conviction stocks that have stumbled.

The strategy entails reviewing your stock positions and identifying shares that are trading for less than their original purchase price. Once you complete that portfolio review, buy a corresponding number of shares at the current market price and then wait 31 days.

After that period, you can sell the original batch of stock and register a realized loss on your taxes—the difference between the initial purchase price and the sales price. At the same time, the cost basis of the stock is reset to the price of the second batch of stock, which raises the odds of paying lower taxes when you ultimately liquidate the position.

It is critical that an investor holds both positions for 31 days. If the stock is sold before 31 days have passed, the transaction violates the Internal Revenue Service’s so-called wash-sale rule. When that happens, the tax loss isn’t allowed.

The deadline for doubling down without violating the wash-sale rule is Nov. 28, according to Michael Schwartz, Oppenheimer & Co.’s chief options strategist.

Anyone who is interested in this strategy should consult their accountant and tax advisor. It is important that tax professionals are aware of what is happening in a client’s investment portfolio.

The double-down strategy isn’t suitable for all stocks. It is best used when a favored, high-conviction equity has run into trouble and tumbled lower.

Because there is risk in doubling down on a fallen stock, Schwartz favors using call options in case the stock never recovers. Call options, which represent 100 shares of the associated stock, increase when stock prices rise. Calls are often used as stock proxies whenever investors want to establish investment exposure to an idea or stock without using a lot of money.

Options always cost less money than buying the associated stock. One drawback, however, is that stock dividends, if applicable, aren’t enjoyed by options investors.

Consider Chipotle Mexican Grill , a popular choice for those who crave healthy foods prepared quickly. The stock has ranged from $38.30 to $66.74 over the past 52 weeks. After getting slammed in Thursday trading, it was hovering at $32.

The company recently approved a $500 million stock buyback, but investors remain concerned about weak earnings and high valuations.

Bullish investors who bought the stock higher and want to reset the stock price could buy a December $36 call that expires in 2026. After 31 days, the original stock position with a higher cost basis could be sold to record a tax loss.

Any gains on the option would be treated as long-term capital gains, assuming you hold it for more than a year and sell it before it expires, Schwartz says.

If the stock fails to rally and remains below the call strike price, the trade fails. The money spent on the call would be lost.

The only solace is that calls cost less than buying the equivalent number of shares, so not as much money is at risk—which is why this tax strategy lends itself to options.

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