Tax loss harvesting with options expiring on multiple weeks

Question

Wash sale related to options.

I’m based in the USA and started trading with options (selling coveres calls and cash secured puts). And tried buying some naked options recently; which went to a loss. Here is the ticker $oxy trade in question:

$OXY, trading at $51.68, Holdings:

• $OXY Shares with +$175 == (+0.30%) returns

$OXY Options

• $OXY $54 Calls expiry 10/18/2024 == -100%
• $OXY $54 Calls expiry 11/01/2024 == -X% (unknown % loss as of today)
• $OXY $60 Calls expiry 5/16/2025 == Y% (unkownn % return, not expecting to sell anytime this year)

Outcome #1: $OXY $60 Calls expiry 5/16/2025 -- closes with -100% loss

Outcome #2: $OXY $60 Calls expiry 5/16/2025 -- closes with +Za% profits but aren't exercised automatically

Outcome #3: $OXY $60 Calls expiry 5/16/2025 -- closes with +Zb% profits and exercised automatically resulting in a purchase event

Outcome #4: $OXY $60 Calls expiry 5/16/2025 -- Sold before expiry with +Zc% profits to avoid shares purchase event.

Doubt #1: Irrespective of Outcome #1-4, these options loss would result in the wash sale anyways.

Doubt #2: Only Outcome #3 would result in wash sale

Question: Which outcome is the best choice given the current situation?

New to options related "wash sale" rules and would like to make right decision for the tax loss harvesting purposes — if I don't trade (I.e. no more buys) it in Oct/Nov-2024 and let it be; considering I have calls expiring 11/1/2024.

I’m planning to not buy anymore — just sell (Irrespective of remaining expiring on 11/1 turning profit or loss). In case of assumed -100% return, will these be counted towards loss lowering my tax burden this year. I kept on buying these OXY calls up until this week — not going to repeat it.

Answer 1

A wash sale occurs when you sell a security at a loss and you buy a “substantially identical” stock, security or option within 30 calendar days before or after this realized loss.

What constitutes replacement securities is up for grabs because unfortunately, the government's definition of substantially identical isn't clear. A rigid interpretation is that if you sell a call at a loss and buy another call within 60 days (within 30 days before or 30 after), that creates a wash sale. Others believe that if the terms of the two calls are different (expiration or strike price), then there is no wash sale.

The short answer is that a wash sale reduces the cost basis on the position sold and adds the wash sale loss to the replacement position’s cost basis, creating phantom taxable income. To avoid this, sell your entire wash sale position by year and remain out of it for 30 days.