7597 / When can an equity option with flexible terms be a qualified covered call option?

Equity options with flexible terms. Unlike equity options with standardized terms, equity options with flexible terms can have strike prices at other than fixed intervals and can have expiration dates other than standardized expiration dates. Under the regulations, equity options with flexible terms may be qualified covered call options if they satisfy certain requirements. Specifically, an equity option with flexible terms is a qualified covered call option only if (1) the option meets the requirements of IRC Section 1092(c)(4)(B) (as outlined in Q 7596); (2) the only payments permitted with respect to the option are a single fixed premium paid no later than five business days after the day on which the option is granted, and a single fixed strike price stated as a dollar amount that is payable entirely at (or within five business days of) exercise; (3) an equity option with standardized terms is outstanding for the underlying equity; and (4) the underlying security is stock in a single corporation.¹ An equity option with standardized terms means an equity option that is traded on a national securities exchange (i.e., a listed option) and that is not an equity option with flexible terms.²

For purposes of applying the general rules, the benchmark for an equity option with flexible terms will be the same as the benchmark for an equity option with standardized terms on the same stock having the same applicable stock price.³

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1.   Treas. Reg. § 1.1092(c)-2(c)(1).

2.   Treas. Reg. § 1.1092(c)-4(b).

3.   See Treas. Reg. § 1.1092(c)-2(c)(2).