Let’s say I have sold a single put on XYZ. The bid/ask spread that was sensible on entry has blown out making it unattractive to buy back the put to exit. Market price begins to steadily move lower against me. If I then short 100 shares of XYZ to hedge further option loss until expiry, have I technically created a “constructive sale” of the option contract? At expiry, the in-the-money contract puts the shares against the short, nullifying it and the trade is complete. The gain or loss is the difference in the strike less shorting price plus the premium. Essentially this seems simply a trade hedging process similar in effect to a covered call and not anything like playing games to change the timing or otherwise evade capital gains taxes. After reading most of Section 1259 that covers constructive sales rules, the answer to this is not clear to me and I want to avoid any more complications/filings if possible. Anyone have experience with this situation or see some point I am missing? Appreciate any thoughts offered!!! T
Only a cpa can clarify officially but if you are hedging it is an exception from constructive sale. If audited you should be able prove to that effect.
Girija, I was leaning that way as the short and put terminating together would be hard to construe as anything else, but over the years I have received several challenges from the IRS (and satisfied them w/o cost or penalties) and want to keep it that way. Appreciate you for taking the time to share your knowledge! T