Option Trading Wash Sales

Options Trading Topic: Wash Sales

Dear Options Trading FAQ:

Your questions and answers about options trading strategy are really apreciated by this eager stock options trader. Thanks for the education on options trading. I posted the following question on the internet but didn't get a response. Wondering if you can answer. I sold a Oct 85 call option on HWP ( unfortunately ) for $3. On expiration day I rolled over to the Jan 85 call options as follows: Buy Oct 85 to close at $7, Sell Jan 85 to open at $9

Can I claim a short term capital loss on the Oct 85 option trade for $4? The Jan 85 trade will be closed in January and I'll claim its profit/loss depending on the situation at that time. Or are there any wash sale rules that can apply for this situation?

Wondering About Wash Sales on Options

Dear Wishy Washy Options Trader:

My friends will claim that I'm the least reliable source of tax-related information they know. And judging by its correspondence, the IRS tends to agree. So take what I'm about to tell you with a grain of salt and consult a competent tax advisor. Perhaps you bean counters out there can also shed some light on this topic and correct me if I am wrong.

I would think that the $4 loss must be taken immediately. The two option contracts are different securities by virtue of the terms of their expiration (or can it be argued otherwise?), so wash rules don't apply. In the tax codes, reference to options as substantially similar securities usually refers to options as compared to the underlying stock (i.e. selling the stock for a loss, but buying a call contract). In your case, the two contracts are separate entities. If they were the exact same contract, and you trade in and out of them short term, the accounting may be different. What does the IRS want us to do in that case? Defer losses until the end of the trading series and adjust cost basis then? I don't know. I guess we'll have to ask an expert. I'd look at the code, but it's just gibberish to me. Hey, I know - let's call the IRS help line! Just kidding.

Good luck and trade well! Remember, an educated options trader is the best options trader. Browse these books books on trading options.

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