Archive for the ‘option spread trading’ Category
I’ve done a bunch of option spreads trades in 2005 and getting to know the tax implications while trying to file returns now.
Do I need to declare completely closed straddle (option spread) positions on Part-II of Form 6781 as per straddle rules? Or is it only required when one is actually have a realized loss but not a realized gain on the other leg of straddle during the year?
If I must use form 6781, does every change in the straddle position make it a new straddle? If that’s the way all rollovers add up as multiple straddles, which can be very complex to track in terms of gains and losses, and wash sales between losses and gains. Is there a simpler way to account just for the net loss or gain during the year without bother about individual transactions and wash sales?
Any help is deeply appreciated.
-Ram
I didn’t declare myself as a trader in 2005 but made a bunch of transactions by the year end. As I also had my full time job, guess I need to stick to the investor status, from what I gathered from various sources. I am aware of the make to market accounting but wouldn’t qualify for it.
The only question actually would be whether a loss sale that is done within 30 days either side of a profit trade on a substantially similar property (stock or related stock option) would be considered a wash sale, even if the second one is closed out within the same year. If that does not become a wash sale, then there is no need to go look for the advantages offered under the straddle rule, to set off some of the otherwise washable losses.
And, I think I found a good answer on www.fairmark.com which I am currently reading to doubly make sure, but it indicates that the wash sale does not apply if the subsequent trade is also closed out within the same year. That’d save me a lot of trouble if so.
This is why I have a stockbroker, Attorneys, and a cpa.
Because they know. You could go to the IRS’s website, and post a question. They will answer you back too…;-)
www.irs.gov/
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straddles considerred so risky?
They dont let you sell NAKED options, which means you dont own the stock you are writing the options for.
Examples: The stock is at $9. You buy the Dec 10 call for $1 and sell the Nov 10 call for .50. You keep the net .50 of the difference. Many brick and mortar brokerages consider you covered, because theoretically if the stock went to $20, your Dec option would cover the short Nov call. But people have still lost LOTS of money, by trying to time the sales and purchase to cover.
I know it looks easy, but it’s not, and Scottrade (and most of the other online brokers) appeal to a retail customer, who typically lose money, and exotic trades like straddles only get them poorer faster.
BTW, you could legally do it if you owned the stock. Example, you sell a covered call option on a stock you own, and buy the same call a month (or more) out. If the stock goes up, you get called (have to sell ) the covered call, BUT the option for the month out goes up (usually much more) in proportion.
Unfortunately you cant do a short straddle, which means you sell the more expensive option, buy the cheaper option for "insurance" and pocket the cash difference.
Lastly, if you dont know why they are so risky, it’s good that Scottrade doesnt let you do it and get in trouble.
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