Tax loss washing with options.

Discussion in 'Options' started by noob_trad3r, Feb 9, 2009.

  1. Will i trigger a wash rule?

    If I sell ATM calls for SPY, lets say it does end up in the money.

    I get assigned.

    I realize a 3% loss let say.

    If I write an ATM put option or slightly OTM put option for the equivalent amount of SPY (contract expires 40 days from now lets say)

    I collect my premium

    Then lets say in 40 days I get put the SPY

    do I trigger a wash sale? or no because I did not really get SPY until 40 days later.
  2. Wow none of the pros here know?

    I found something. Not sure if it is still valid.

    It says the IRS will not tolerate a deep in the money put but it is okay to write an At the money or out of the money put.

    Nice. so you can harvest up losses and collect tax free dividends etc..
  3. spindr0


    A non pro answer:

    Since you didn't mention shares, I assume that you sold naked calls initially. When those were assigned, that meant that you ended with short stock that you closed for a 3% loss.

    If you then sold an equiv amount of at or ITM puts WITHIN 30 days of the realized loss, that would not be substantially identical securities and would not trigger a wash sale. Note that it's the date that you engage in the option transaction that's relevant to the Wash Sale not when expiration occurs (40 days later in your example).

    How much the put is ITM at time of sale is also irrelevant unless your original scenario involved the sale of stock at a loss. Then you'd be dealing with substantially identical and would face the deep ITM test.

    One thing is for sure. Not only are there no free lunches in the market but the IRS will bang you for more taxes at every possible opportunity. For example, even playing in 2 different stocks prior to their merger can trigger a Wash Sale.
  4. spindr0


    You give peeps 13 minutes to respond? LOLOL

    As with many IRS positions, the ITM rule isn't precisely defined as to when it's deep enough in the money for the rule to apply. The rule applies if when you sell it, there's not much chance that it will expire.

    I have no clue how dividends involved are tax fee. Care to elaborate?
  5. no it was a covered call on my SPY I wrote some and it is a 3% loss (300 shares of SPY) 3 contracts.

    They will probably expire in the money this February.
  6. spindr0


    In terms of timing, the wash sale covers 30 days before and 30 days after the loss is realized.
  7. That is the grey area.

    So if SPY sold for a loss. but I write a put 35 days to expiration, out of the money how am I to guess that it might somehow expire in the money and I get assigned?
  8. Thanks. I found this as well. Wow IRS really is a ball buster.

    I guess then I will have to write an OTM put 60 days out.

    More time premium at least.

    Selling Put Options
    You can also turn a sale of stock into a wash sale by selling put options. This rule is not automatic. It applies only if the put option is deep in the money — and there's no precise standard as to when a put option is deep enough in the money for the rule to apply. The rule applies if it appears, at the time you sell the put option, that there is no substantial likelihood it will expire unexercised. In this circumstance, selling the put option can be roughly equivalent to buying the stock.

    Example: On March 31 you sell 100 shares of XYZ at a loss. On April 10 you sell a put option giving the holder the right to sell to you 100 shares of XYZ at a price substantially higher than the current market price of the stock. The sale on March 31 is a wash sale.

    As seller of a put option that's deep in the money, you participate in the upward and downward movement of the stock price, unless the price moves higher than the option price. If the option price is high enough, the chances of that happening are small, and you've simply found a different way to continue your investment in the stock.
  9. I found another good article.

    Investors and their advisers are rightfully concerned about running afoul of the wash sale rule and triggering a taxable event. As you know, a wash sale — as defined in Section 1091 of the Internal Revenue Code — occurs when an investor sells property at a loss and within 30 days acquires "substantially identical" property.
    Unfortunately, the government's definition of "substantially identical" is not crystal-clear, leading many transactions to come under the wash sale rule despite the best intentions of advisers and investors.

    Consider one options play intended to work within the wash sale rule — the sale of a put option after shares are sold for a loss. This strategy can be more useful this year because of extreme volatility; when volatility is high, so too are any put option premiums.

    Let's say Jane Investor sells ABC at $100 for a loss. She then receives $9 for selling an at-the-money put with a strike price of $100 expiring 31 days (or more) from now.

    Jane plans to repurchase ABC at option expiration either through the option's exercise or open-market purchase of ABC shares.

    Internal Revenue Service Ruling 85-87 states that if an investor sells stock for a loss and within 30 days sells a put option, the sale of the put option could trigger the wash sale rule. The rule allows for the sale of puts only if they are not "likely to be exercised."

    Because there are no guidelines for this "not likely to be exercised" standard, most practitioners advise the writing of puts that are either at or out of the money. They would advise that Jane sell puts with a strike price of $100 or below with ABC trading at $100.

    The more Jane receives for selling puts, the more her performance will keep pace with ABC common. Performance will be affected only if ABC grows to more than $109 in the requisite 31 days. The more money received for the put options, the more confident Jane can be that she won't miss appreciable ABC stock growth.

    Another option strategy to stay invested but still stay within the wash sale rule actually calls for purposely failing the test before repurchasing any shares.

    If an investor sells a stock for a loss and buys a call option (within the 31-day window) the wash sale rule is triggered. This applies to any call option. I agree with the law that the purchase of a very deep in-the-money call might act "identically" to the stock, but certainly not an out-of-the money call option.

    It might make more sense if the wash sale rule applied only when there were a high likelihood of the calls' being exercised, such as in the language used in the put example.

    The penalty for a wash sale is the deferral of any capital loss that has been realized. Again, the capital loss is deferred, not lost, and the deferred loss increases the cost basis of the recently purchased property.

    Let's say Jane Investor purchased ABC for $130 a share two years ago. On Nov. 7, she sells ABC for $100 and soon after buys a call option on ABC for $6. In this example, Jane now owns a call option worth $6 that has a cost basis of $36.

    When the call is sold, a loss could occur if the value is less than $36. Of course, this loss could be caught again by the wash sale rule.

    But it is harder to trigger the wash sale rule from exiting option positions. Ironically, the subsequent purchase of shares does not trigger the wash sale from losses on options (Ruling 58-384). I know this asymmetric treatment is not logical, but it is the law. Therefore, Jane can buy the ABC shares back in less than 31 days as long as she buys a call option on ABC between the two transactions.

    To summarize the technique: 1) Sell stock for a loss; 2) Buy a call option that triggers the wash sale rule; 3) Buy back the shares that were sold earlier for a loss.

    Alternatively, there are those who throw in the towel and give up on shares with losses. Here too, options may be useful. In the example above, Jane had $30 of unrealized long-term losses. If she possessed both short-term gains and long-term gains, she would find much more value in a short-term loss than in a long-term loss.

    As in the prior strategy, Jane sells her shares for $100, buys a call option on ABC and triggers a wash sale. But instead of selling the calls, she wants to exercise the calls and start a new holding period.

    After exercising the calls and buying ABC again, she can sell the shares for a short-term loss instead of the long-term loss that would have occurred had Jane simply sold her ABC shares or her ABC call options.

    Robert N. Gordon is chief executive of Twenty-First Securities Corp., a New York-based brokerage firm. He can be reached at

    For archived columns, go to
  10. spindr0


    That's the understatement of the year. The wash sale violation wouldn't be such a hassle if the entire loss was moved forward to the next year. But if you trade repeatedly and in different lot sizes, you can end up having that initial wash sale contaminate many subsequent trades. It's a friggin nightmare!

    It doesn't matter how far away expiration is. It's when you execute the option trade that determines whether it qualifies as a wash sale.
    #10     Feb 10, 2009