Tax consequences of trading staddle options puts and calls


The tax rules in this area are somewhat complex. They are as follows:. Therefore, if the stock price is below the strike price of the short put, an assessment must be made if early assignment is likely. In-the-money calls whose time value is less than the dividend have a high likelihood of being assigned. In the case of a covered straddle, it assumed that being assigned on the short call is a good event, because assignment of the call converts the stock position to cash and a profit is realized tax consequences of trading staddle options puts and calls including the short put which remains open — with risk — until expiration.

Although the net delta of a covered straddle position is always positive, it varies between 0. Investment Company Notebook Practical insight and analysis on the accounting, audit and tax issues impacting investment companies. Rather, the long stock position, or account equity, is used as collateral to meet the margin requirement for the short put. In general, for stock whose "applicable price" is:.

Therefore, if account equity declines sufficiently, a margin call will be triggered. The first four conditions are relatively self-explanatory, however, the "deep-in-the-money" test needs further clarification. Practical insight and analysis on the accounting, audit and tax issues impacting investment companies.

Reprinted with permission from CBOE. There is another statutory exception to the straddle rules that says: Since a covered straddle has two short options, the position loses doubly when volatility rises and profits doubly when volatility falls. Practical insight and analysis on the accounting, audit and tax issues impacting investment companies.

However, if additional shares are wanted, then no action needs to be taken. In-the-money calls whose time value is less than the dividend have a high likelihood of being assigned. Your email address Please enter a valid email address. This is known as time erosion, and short option positions profit from time erosion if other factors remain constant.

However, if selling the stock is not wanted, then buying the short call to eliminate the possibility of assignment is necessary. The position profits if the underlying stock trades above the break-even point, but profit potential is limited. In the example above, the maximum profit is 6.

They are as follows:. They are as follows: Early assignment of stock options is generally related to dividends. Skip to Main Content.

The above is based upon generally available option strike tax consequences of trading staddle options puts and calls. The covered straddle is suitable only for aggressive investors who are suited to taking this risk. Therefore, if the stock price is below the strike price of the short put, an assessment must be made if early assignment is likely. For a call option to be "qualified," it must meet five conditions. If the short put in a covered straddle is assigned, then stock is purchased at the strike price.

The first four conditions are relatively self-explanatory, however, the "deep-in-the-money" test needs further clarification. When volatility falls, short option positions make money. All information you provide will be used by Fidelity solely for the purpose of sending the email on your behalf. If the short call in a covered straddle is assigned, then the stock is sold at the strike price and replaced with cash. Volatility is a measure of how much a stock price fluctuates in percentage terms, and volatility is a factor in option prices.