Straddle rules

Also called: IRC §1092 straddle rules

A "straddle" for tax purposes is holding offsetting positions that substantially reduce your risk of loss — for example, owning stock and a put or call that hedges it. IRC §1092 limits the tax benefits of such positions.

What do the straddle rules do?

When positions form a straddle, you generally cannot recognize a loss on one leg while the offsetting leg still has unrealized gain, and the holding period of the hedged asset can be suspended. The aim is to stop investors from manufacturing losses without giving up economic exposure.

How do option overlays work around them?

The qualified covered call exception is the main relief valve: a call meeting the §1092 strike and term tests is not treated as part of a straddle, so the stock keeps its holding period. Structuring overlays to stay within those tests is central to keeping the tax treatment clean.

This definition is for educational and informational purposes only and is not investment, tax, or legal advice. Option strategies involve risk and are not suitable for all investors. Tax treatment of options is complex and depends on individual circumstances, holding periods, and applicable law. Consult a qualified tax professional and investment advisor before acting. Yayati Asset Management is a Registered Investment Adviser.