Wash Sales & Options

[rayfinkle]

One strategy I use to be disciplined about buying a stock that I like is to write puts and wait. I generally use this for companies in which I'm accumulating a long-term (read: decades-long) position. Sometimes I miss the boat, but usually I wait around for a few weeks or months and collect premiums, "rolling" my sold puts from month to month.

 

I know that if I sell a put contract and am exercised then the premium rolls into the cost basis of the underlying purchase. For example, if I've sold 1 contract of $130 BRKB puts for $2 and am exercised, my cost basis is now $128. Therefore I'm deferring the taxes on the ST cap gains from selling the put, and converting this into a LT gain to be realized if/when I sell my BRK position. I've spoken to a tax attorney about this.

 

But what happens if, before this transaction, I've sold 10 other "substantially identical" puts on BRKB? If I'm not exercised, and I've created each new position within 30 days of the last, I seem to have created a string of "wash sale" transactions. Therefore if I am eventually exercised, my basis might be lower (e.g., if I've sold 10 sequential contracts of 1 share of $130 BRKB at for $2 and therefore collected a total of $20 in premiums, my cost basis could be $110).

 

So, the question is: does anyone know if selling options creates a wash sale in this way?

 

 

 

 

 

[gfp]

I'm not sure how the wash sale rule would apply since there is no "sale" and no loss.  Selling put options is a purchase as far as the wash sale rule is concerned.  If you don't get put to, those premiums will be short term gains.  When you do get put to, only that contract's premium gets incorporated into the cost basis of that lot and potentially converted to a long term gain.  The wash sale only applies if you have a realized loss somewhere that you want to protect.  If you have a realized loss, the wash sale can be triggered by selling a put within 30 days (similar to repurchasing a long position in the underlying), but only if it's deep in the money - "if it appears, at the time you sell the put option, that there is no substantial likelihood it will expire unexercised." - talk about leaving it up to interpretation...

[rayfinkle]

I'm not sure how the wash sale rule would apply since there is no "sale" and no loss.  Selling put options is a purchase as far as the wash sale rule is concerned.  If you don't get put to, those premiums will be short term gains.  When you do get put to, only that contract's premium gets incorporated into the cost basis of that lot and potentially converted to a long term gain.  The wash sale only applies if you have a realized loss somewhere that you want to protect.  If you have a realized loss, the wash sale can be triggered by selling a put within 30 days (similar to repurchasing a long position in the underlying), but only if it's deep in the money - "if it appears, at the time you sell the put option, that there is no substantial likelihood it will expire unexercised." - talk about leaving it up to interpretation...

 

I hear you on the "no sale" and also on the "up to interpretation"!!!

 

I have a (young) CPA/ tax attorney friend that had no immediate answer on this, but advised that it was not obvious to him that the wash logic was not valid.

 

The boundary condition that makes this tough is that it opens up the logical possibility of having a negative basis. But I guess this is also possible buying a call???at least theoretically.