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If I short a spread and roll it over the next month at a profit, does the losing leg carry over to the new trade?

Example:

  • Short 1 January PUT $200 Strike +$100
  • Long 1 January PUT $150 Strike -$30

One month later, close the JAN spread and open FEB spread:

  • Long 1 January PUT $200 Strike -$20
  • Short 1 January PUT $150 Strike +$3
  • Profit: $53

  • Short 1 February PUT $200 Strike +$100

  • Long 1 February PUT $150 Strike -$30

Although, the first spread as a combo was profitable, the losing leg had a loss of -$27. Does that carry over to the new trade per wash sale rules or will it be absorbed by the $53 profit?

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I'm not going to offer an opinion because wash sale rules are not clear for options. Here are the opinions from 3 web sites that I deem worthwhile:

IRS enforcement of offsetting position rules

Frankly, the offsetting position rules are complex, nuanced and inconsistently applied. There are insufficient tools and programs for complying with straddle loss deferral rules. Brokers don’t comply with taxpayer wash sale rules or straddle loss deferral rules on Form 1099Bs or profit and loss reports. Few local tax preparers and CPAs understand these rules, let alone know how to spot them on client trading records.

The IRS probably enforces wash sale and straddle loss deferral rules during audits of large taxpayers who are obviously avoiding taxes with offsetting positions. They make a lot of money, but it’s always deferred to the next tax year. The IRS doesn’t seem to be questioning wash sales and straddles during exams for the average Joe Trader.

Losses on Options

Congress amended the wash sale rule in 1988 so that it applies directly to contracts or options to buy or sell stock or securities. That means you can have a wash sale when you close an option position at a loss, if you establish a replacement position within the wash sale period. The Treasury has yet to issue regulations under this rule, and a host of questions remain unanswered. Foremost among these is the question of when one option is substantially identical to another option.

Until the Treasury decides to issue regulations or other guidance, neither I nor anyone else can say exactly how the wash sale rule applies to losses on options. But there’s a pretty good rule of thumb that should tell you when you’re safe and when you’re on thin ice. If the positions you acquired within the wash sale period permit you to participate in the same up and down market swings as the position that produced the loss, there’s a chance the IRS will say you have a wash sale. If that’s not the case, you should be safe.

Suppose you’ve sold a call option at a loss. Buying another call option on the same stock within the wash sale period may be viewed as a wash sale even if the new call option has a different expiration or a different strike price. The IRS might assert that you have a wash sale if you buy XYZ stock, especially if the call was in the money when you sold it. Similarly, you could also have a wash sale if you write a deep-in-the-money put option during the wash sale period.

By contrast, you shouldn’t have a wash sale if you sell a call option at a loss and also write a put option that’s at the money or out of the money. The long call option and the short put option are both bullish positions, but the short put option doesn’t let you participate in the upside.

IRS publication 550 page 56 states in part:

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

  1. Acquire a contract or option to buy substantially identical stock or securities.

What this means for the stock and options trader is that if you take a loss on a stock or an option and then buy back that same stock, or an option on that same stock, whether the option is the same month and strike price or not, you have a wash sale. The same holds true if you close an option position for a loss and then buy the same underlying stock within the 30 day window. There is no clarification in the tax law as to how far "in or out of the money" the option is, or what month and year the option expires. So TradeLog simply applies this rule as follows: If the underlying stock is the same, then the option is "substantially" the same. For details see our Chart of Wash Sale Triggers section below.

See the list of wash sales here: Which Trades Can Trigger a Wash Sale?

Read the entire article and judge for yourself.

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  • This is the material that confused me. Since there was a new equivalent trade with the same underlying and direction, then it's a considered a wash sale. However, since it's part of a combo, then the security traded is a "200/150 PUT Spread", and that itself was closed at a profit. – Laith Dec 27 '19 at 19:09
  • @Laith - I have a load of wash sales each year and I make it a habit of trying to close them out as well as anything that might become one (like the positions you posted) should my interpretation be wrong. To me, it's not worth the hassle of having to redo my spreadsheets and refile. I used to use Tradelog but I don't trade that kind of volume anymore. – Bob Baerker Dec 27 '19 at 19:15
  • I thought about that actually. To guarantee no wash sale, stop trading that underlying in Dec & Jan and let the time condition lapse. – Laith Dec 27 '19 at 19:21
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    This is an excellent answer, especially the color given regarding local CPAs' lack of knowledge regarding these rules. – Knocks X Mar 28 '20 at 18:32

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