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An investor owns a stock portfolio consisting of 200 stocks each from the S&P 500 index with a significant amount of unrealized gains. He then sells calls on the S&P 500 index at the money. 100 days later, he buys back the calls at a loss. Is the loss currently deductible against other gains he has taken?

I believe it is, but if the position I described is viewed as a straddle than I believe it would not be.

Bob Sherry

Note: For more information regarding this issue you can look at a PDF which can be found at the following URL: https://www.gpo.gov/fdsys/pkg/FR-1995-03-20/pdf/95-6693.pdf . You can search for the phrase:

Where Risk of Loss Diminished

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  • You can't deduct against unrealized gains, are you implying that you'd sell some of your unrealized for a realized gain which you could then deduct losses against?
    – quid
    Commented Apr 9, 2018 at 22:26
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    What country's tax rules are you asking about?
    – Chris W. Rea
    Commented Apr 9, 2018 at 23:20
  • I am talking about the United States.
    – Bob
    Commented Apr 9, 2018 at 23:42
  • @quid Assume that the investor has sold stock a month earlier (but in the same tax year) and has gains from the sale of that stock.
    – Bob
    Commented Apr 9, 2018 at 23:43
  • @Bob it's a bit confusing since original post discusses unrealized gains on long stock and comment talks about assuming there are gains from the sale of stock. Be that as it may, wash sales involve booking a loss and taking a substantially identical position withing 30 days before or after the loss date. Since you booked a gain when you sold stock a month earlier, there is no wash sale complication AND short calls are not substantially identical to long stock which was sold.
    – Bob Baerker
    Commented Apr 10, 2018 at 0:32

2 Answers 2

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What is $100$ days later? Why dollar signs?

What is owning "200 stocks each from the S&P 500 index"? Do you own 200 shares of every one of the 500 SPX component stocks or do you own shares of 200 of the 500 stocks in the SPX?

Per the IRS:

"A STRADDLE is any set of offsetting positions on personal property. For example, a straddle may consist of a purchased option to buy and a purchased option to sell on the same number of shares of the security, with the same exercise price and period.

An OFFSETTING POSITION is a position that substantially reduces any risk of loss you may have from holding another position."

In common speak, a straddle is a position that consists of a put and a call at the same strike price, with the same expiration. It can be a long straddle (buy both) or it can be a short straddle (sell both). These can be duplicated synthetically with combinations of long or short stock and 2 long or 2 short puts (4 permutations).

The short answer is that you own all 500 stocks then you have sold synthetic covered calls. If you own 200 of the 500 stocks then you have hedged. Either way, this is not a straddle.

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  • The dollar signs were put in, in error. I will take them out.
    – Bob
    Commented Apr 10, 2018 at 11:49
  • When I say the investor owns 200 shares, I am saying he owns shares in 200 different companies.
    – Bob
    Commented Apr 10, 2018 at 11:52
  • Are you telling me that if an investor owns 490 out of the 500 stocks in the S&P 500 and he sells calls on the S&P 500 and then buys back those calls at a loss, then he can then deduct the loss on the calls against other realized gains?
    – Bob
    Commented Apr 10, 2018 at 11:56
  • I can't answer the question of whether the IRS considers owning 490 of the 500 SPX stocks as substantially identical to BUYING calls on the index. But that's not the issue here since you are selling the calls. Therefore the substantially identical is non existent and irrelevant and the call losses are deductible. If you were BTO the calls then it could be a different story if you booked a loss and purchased shares within the 60 day window (or sold shares at a loss and bot calls in the window). I think that the problem here is that you don't clearly understand what a wash sale violation is.
    – Bob Baerker
    Commented Apr 10, 2018 at 12:39
  • In this case of owning 490 out of the 500 stocks, being short calls on the S&P 500 significantly reduces your risk and therefore because of the straddle loss limit rule, the loss is not currently deductible. I do agree that the wash rule does not apply.
    – Bob
    Commented Apr 10, 2018 at 12:47
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What you described is not a straddle. You are conflating two terms to force your desired tax outcome. Because straddles are actual things, your view will fail.

And how would you buy back the option at a loss? Like, why? Since you are only dealing with short term capital gains anyway then just let the option get exercised and purchase your shares back.

And if you are going for long term capital gains by never selling the shares, then you won't have deductible losses! It is most likely that you will actually have more gains because of the time premium of the options. You either have that, or your stock gets called away, you will never generate a loss on a covered call which involves you buying back the call at a loss.

Hope that helps!

A straddle for you would basically just be buying an at the money put. And then you would be spending money, so theoretically that would become a loss, every time it expires worthless or doesn't hit your breakeven point. Seems like a lot of effort for that kind of portfolio, would be better off buying the SPY ETF and using that ETF's puts, or SPX's index puts

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  • Why buy back calls at a loss? Some people sell OTM calls for income on appreciated stock but don't want assignment due to tax LTCG consequences, hence the buy back. I wouldn't book losses on the short calls to protect paper gains on the stock since the market has a perverse way of making you pay for that. Either sell the covered calls and accept the assignment or don't monkey around with them at all (or roll the short calls if they approach ATM and you can still garner a decent credit).
    – Bob Baerker
    Commented Apr 10, 2018 at 12:46
  • Also, just letting the option get exercised and immediately purchasing the shares back isn't always viable since you may pay more for the shares than you received for them (strike + premium) along with that pesky tax bite if non sheltered.
    – Bob Baerker
    Commented Apr 10, 2018 at 12:58
  • @BobBaerker yeah bob the buyback question was directed at OP specfically about which capital gains treatment they were going for because nothing they said was congruent with the atrategy
    – CQM
    Commented Apr 10, 2018 at 14:47

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