CAUTION, this in ONLY the definition. The application is more complex but if you really want to know more you can get IRS Pub No. 550.
IRS-PUB, -98, IRS Publication No. 550 , Exceptions
A deep-in-the-money option is an option with a strike price lower than the lowest qualified benchmark (LQB). The strike price is the price at which the option is to be exercised. The LQB is the highest available strike price that is less than the applicable stock price. However, the LQB for an option with a term of more than 90 days and a strike price that is more than $50 is the second highest available strike price that is less than the applicable stock price. Strike prices are listed in the financial section of many newspapers.
The applicable stock price for any stock for which an option has been granted is:
1) The closing price of the stock on the most recent day on which that stock was traded before the date on which the option was granted, or
2) The opening price of the stock on the day on which the option was granted, but only if that price is greater than 110% of the price
determined in (1).
If the applicable stock price is $25 or less, the LQB will be treated as not less than 85% of the applicable stock price. If the applicable stock price is $150 or less, the LQB will be treated as not less than an amount that is $10 below the applicable stock price.
Example. An XYZ/September call option was granted on May 13, 1997. The closing price of one share of XYZ stock on May 12, 1997, was $130
1/4. The strike prices of all the XYZ/September options offered on May 13, 1997, were as follows: $110, $115, $120, $125, $130, and $135. The option was granted more than 90 days before expiration. Therefore, the LQB is the second highest strike price that is less than the applicable stock price. This amount is $125. On May 13, 1997, you held XYZ stock and you acquired an XYZ/September option granted for a strike price of $120. The call granted is a deep-in-the-money option because it is lower than the LQB. The option granted is not a qualified covered call option and the loss deferral rules apply if the call or the stock was closed out at a loss during the year.
Isn't the tax code great!!!! Wonder when the American People will say ENOUGH
Monty |
