[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1234-2]

[Page 314-316]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1234-2  Special rule for grantors of straddles applicable to certain 
options granted on or before September 1, 1976.

    (a) In general. Section 1234(c)(1) provides a special rule 
applicable in the case of gain on the lapse of an option granted by the 
taxpayer as part of a straddle. In such a case, the gain shall be deemed 
to be gain from the sale or exchange of a capital asset held for not 
more than 1 year (6 months for taxable years beginning before 1977; 9 
months for taxable years beginning in 1977) on the day that the option 
expired. Thus, such gain shall be treated as a short-term capital gain, 
as defined in section 1222(1). Section 1234(c)(1) does not apply to any 
person who holds securities (including options to acquire or sell 
securities) for sale to customers in the ordinary course of his trade or 
business.
    (b) Definitions. The following definitions apply for purposes of 
section 1234(c) and this section.
    (1) Straddle. The term straddle means a simultaneously granted 
combination of an option to buy (i.e., a call) and an option to sell 
(i.e., a put) the same quantity of a security at the same price during 
the same period of time.
    (2) Security. The term security has the meaning assigned to such 
term by section 1236(c) and the regulations thereunder. Thus, for 
example, the term security does not include commodity futures.
    (3) Grantor. The term grantor means the writer or issuer of the 
option contracts making up the straddle.
    (4) Multiple option. The term multiple option means a simultaneously 
granted combination of an option to buy plus an option to sell plus one 
or more additional options to buy or sell a security.
    (c) Special rules in the case of a multiple option. (1) If, in the 
case of a multiple option, the number of the options to sell and the 
number of the options to buy are the same and if the terms of all of the 
options are identical (as to the quantity of the security, price, and 
period of time), then each of the options contained in the multiple 
option shall be deemed to be a component of a straddle for purposes of 
section 1234(c)(1) and paragraph (a) of this section.
    (2) If, in the case of a multiple option, the number of the options 
to sell and the number of the options to buy are not the same or if the 
terms of all of the options are not identical (as to the quantity of the 
security, price, and period of time), then section 1234(c)(1) applies to 
gain on the lapse of an option granted as part of the multiple option 
only if:
    (i) The grantor of the multiple option identifies the two options 
which comprise each straddle contained in the multiple option in the 
manner prescribed in subparagraph (3) of this paragraph; or
    (ii) It is clear from the facts and circumstances that the lapsed 
option was part of a straddle. See example (6) of paragraph (f) of this 
section. A multiple option to which this subdivision applies may not be 
regarded as consisting of a number of straddles which exceeds the lesser 
of the options to sell or the options to buy as the case may be. For 
example, if a multiple option of five puts and four calls is granted it 
may not be regarded as consisting of more than four straddles, although 
the particular facts and circumstances could dictate that the option 
consists of less than four straddles.
    (3) The identification required under subparagraph (2)(i) of this 
paragraph shall be made by the grantor indicating in his records, to the 
extent feasible, the individual serial number of, or other 
characteristic symbol imprinted upon, each of the two individual options 
which comprise the straddle, or

[[Page 315]]

by adopting any other method of identification satisfactory to the 
Commissioner. Such identification must be made before the expiration of 
the 15th day after the day on which the multiple option is granted. The 
preceding sentence shall apply only with respect to multiple options 
granted after January 24, 1972. In computing the 15-day period 
prescribed by this paragraph, the first day of such period is the day 
following the day on which the multiple option is granted.
    (d) Allocation of premium. The allocation of a premium received for 
a straddle or a multiple option between or among the component options 
thereof shall be made on the basis of the relative market value of such 
component options at the time of their issuance or on any other 
reasonable and consistently applied basis which is acceptable to the 
Commissioner.
    (e) Effective date--(1) In general. This section, relating to 
special rules for grantors of straddles, shall apply only with respect 
to straddle transactions entered into after January 25, 1965, and before 
September 2, 1976.
    (2) Special rule. For a special rule with respect to the 
identification of a straddle granted as part of a multiple option, see 
paragraph (c).
    (f) Illustrations. The application of section 1234(c) and this 
section may be illustrated by the following examples:

    Example 1. On February 1, 1971, taxpayer A, who files his income tax 
returns on a calendar year basis, issues a straddle for 100 shares of X 
Corporation stock and receives a premium of $1,000. The options 
comprising the straddle were to expire on August 10, 1971. A has 
allocated $450 (45 percent of $1,000) of the premium to the put and $550 
(55 percent of $1,000) to the call. On March 1, 1971, B, the holder of 
the put, exercises his option. C, the holder of the call, fails to 
exercise his option prior to its expiration. As a result of C's failure 
to exercise his option, A realizes a short-term capital gain of $550 
(that part of the premium allocated to the call) on August 10, 1971.
    Example 2. Assume the same facts as in example (1), except that C 
exercises his call on March 1, 1971, and B fails to exercise his put 
prior to its expiration. As a result of B's failure to exercise his 
option, A realizes a short-term capital gain of $450 (that part of the 
premium allocated to the put) on August 10, 1971.
    Example 3. Assume the same facts as in example (1), except that both 
B and C fail to exercise their respective options. As a result of the 
failure of B and C to exercise their options, A realizes short-term 
capital gains of $1,000 (the premium for granting the straddle) on 
August 10, 1971.
    Example 4. On March 1, 1971, taxpayer D issues a multiple option 
containing five puts and five calls. Each put and each call is for the 
same number of shares of Y Corporation stock, at the same price, and for 
the same period of time. Thus, each of the puts and calls is deemed to 
be a component part of a straddle. The puts and calls comprising the 
multiple option were to expire on September 10, 1971. All of the puts 
are exercised, and all of the calls lapse. As a result of the lapse of 
the calls, D realizes a short-term capital gain on September 10, 1971, 
in the amount of that part of the premium for the multiple option which 
is allocable to all of the calls.
    Example 5. Assume the same facts as in example (4) except that one 
of the puts and two of the calls lapse and the remaining puts and calls 
are exercised. As a result, on September 10, 1971, D realizes a short-
term capital gain in the amount of that part of the premium for the 
multiple option which is allocable to both of the lapsed calls and the 
lapsed put.
    Example 6. On March 1, 1971, taxpayer E issues a multiple option 
containing five puts and four calls. Each put and call is for the same 
number of shares of Y Corporation stock at the same price and for the 
same period of time, E does not identify the puts and calls as parts of 
straddles in the manner prescribed in paragraph (c)(3) of this section. 
However, because the terms of all of the puts and all of the calls are 
identical four of the puts and four of the calls are deemed to be a 
component part of a straddle. The puts and calls comprising the multiple 
option were to expire on September 10, 1971. Four of the puts are 
exercised and the four calls and one of the puts lapse. As a result, on 
September 10, 1971, E realizes short-term capital gain in the amount of 
that part of the premium for the multiple option which is allocable to 
the four lapsed calls and realizes ordinary income in the amount of that 
part of such premium which is allocable to the lapsed put. If E had 
identified four of the puts and four of the calls as constituting parts 
of straddles in the manner prescribed in paragraph (c)(3) of this 
section and the put that lapsed constituted part of a straddle, then the 
gain on the lapse of the put would also be short-term capital gain.
    Example 7. Assume the same facts as in example (6) except that two 
of the puts are for Y Corporation stock at a price which is greater than 
that of the other puts and the other calls and that two of the calls 
expire on October 10, 1971. Additionally, assume that the put which 
lapses is at the lower price. The two puts offering the Y Corporation 
stock at the greater price and the two calls with the later expiration 
date cannot

[[Page 316]]

be deemed to be component parts of a straddle. Thus, only two of the 
puts and two of the calls are deemed to be a component part of a 
straddle. As a result, E realizes income as follows:
    (i) On September 10, 1971, short-term capital gain in the amount of 
that part of the premium for the multiple option which is allocable to 
the two lapsed calls with the expiration date of September 10, 1971, and 
ordinary income in the amount of that part of such premium which is 
allocable to the lapsed put. If E had identified two of the puts at the 
lower price and the two calls with the expiration date of September 10, 
1971, as constituting parts of straddles in the manner prescribed in 
paragraph (c)(3) of this section and if the put that lapsed was one of 
those identified as constituting a part of a straddle, then the gain on 
the lapse of that put would also be short-term capital gain.
    (ii) On October 10, 1971, ordinary income in the amount of that part 
of the premium for the multiple option which is allocable to the lapsed 
calls with an expiration date of October 10, 1971.

[T.D. 7152, 36 FR 24801, Dec. 23, 1971, as amended by T.D. 7210, 37 FR 
20688, Oct. 3, 1972; T.D. 7652; 44 FR 62282, Oct. 30, 1979; 44 FR 67657, 
Nov. 27, 1979; T.D. 7728, 45 FR 72650, Nov. 3, 1980]