Covered Calls, Protective Puts and the Straddle Rules

Reviewed by Leon Moyer - Published October 9, 2026 - Last reviewed October 9, 2026

Stock plus an option that offsets it may be a tax straddle, which can defer losses and change holding periods. A qualified covered call is outside the loss deferral rules, though an in-the-money one pauses the stock's holding period. A protective put on stock held one year or less wipes out its holding period until the put ends or the stock is sold; a married put avoids that short-sale rule, but the straddle rules can still delay the stock's holding period.

What is a straddle for tax purposes?

Publication 550 defines a straddle as any set of offsetting positions on personal property. A position is offsetting if it substantially reduces your risk of loss on another.

Stock is generally excluded from "personal property" here, but Publication 550 includes it when the stock is actively traded and at least one offsetting position is on that stock or substantially similar or related property. So 100 shares with a protective put, or a long call with a long put on the same stock, can each be a tax straddle.

How do the straddle loss deferral rules work?

Publication 550 says you can generally deduct a loss on one position of a straddle only to the extent it is more than the unrecognized gain on the offsetting positions you still hold. The unused loss is treated as sustained in the next tax year.

Publication 550 adds that a straddle position's holding period generally begins no earlier than the day the straddle ends, unless you held that position more than one year before the straddle began. Rules similar to the wash sale rule also apply to straddles.

Exceptions include identified straddles (with their own basis rule), hedging transactions, all-Section 1256 straddles and qualified covered calls.

What makes a covered call qualified?

Publication 550 exempts a straddle made up only of qualified covered call options and the stock to be purchased from you under them, if it is not part of a larger straddle. A qualified covered call is written on stock you hold and meets every one of these tests:

• It is traded on a national securities exchange or another market the Treasury approves.
• It is granted more than 30 days before expiration, and, for calls written after July 28, 2002, generally not more than 12 months before expiration.
• It is not deep in the money, which Publication 550 defines against a "lowest qualified benchmark" strike tied to the stock's prior close and the strikes available.
• You are not an options dealer writing it in the course of dealing, and the gain or loss on it is capital.

A covered call that fails a test can form a tax straddle with the stock: losses can be deferred, a loss on the call can be long-term, and the holding period of stock held one year or less can be delayed.

A special year-end rule still applies: if you close the call or sell the stock at a loss, the gain on the other side falls in a later year, and you did not keep the other side for at least 30 days after that, the loss deferral rules apply anyway.

How does an in-the-money covered call affect holding period?

If you write a qualified covered call with a strike below the applicable stock price, Publication 550 says two things change. Any loss on the call is treated as a long-term capital loss if, when the loss is realized, a gain on the stock would have been long-term. And the stock's holding period does not include any period during which you are the writer of the call.

How do protective puts affect holding period?

Publication 550 says buying a put is generally treated as a short sale. If you held the stock one year or less when you bought the put, any gain on the put is short-term, and the stock's holding period begins again on the earliest of the dates you dispose of the stock or the put is exercised, sold or expires.

If you held the stock more than one year when you bought the put, that rule does not apply. But under Publication 550's straddle loss rule, a loss on a put protecting stock held over a year can be treated as long-term.

What is the married put exception?

Section 1233(c) carves out a put bought on the same day as the stock that is identified as intended to be used in exercising it, and that, if exercised, is exercised by selling that stock. It is not treated as a short sale. If it is not exercised, the code says the put's cost is added to the basis of the stock it was identified with.

For example, you buy 100 XYZ shares at $50 for $5,000 and, the same day, an XYZ 48 put for 1.20, or $120, identified with those shares. If the put expires unexercised, your basis in the shares becomes $5,000 + $120 = $5,120, or $51.20 per share. For actively traded stock, the shares and a married put can still be a tax straddle, so the straddle holding-period rule above can delay the stock's holding period.

If the put does not name the shares, Treasury Regulation 1.1233-1 allows the identification to be entered in your records within 15 days after you acquire the shares, but recording it the day you buy them is safer.