7558 / How are options classified for purposes of the federal income tax?

An option is “listed” if it is traded on, or subject to the rules of, one of the following: (1) a national securities exchange registered with the SEC (as, for example, in the case of a stock option trading on the AMEX); (2) a domestic board of trade that has been designated as a contract market by the Commodities Futures Trading Commission (as in the case of certain options on regulated futures contracts); or (3) another exchange, board of trade, or market designated by the Secretary of the Treasury. All other options are considered “unlisted.”¹

A listed option covers 100 shares of a particular stock, specifies a fixed (“striking”) price per share for exercise, and has a fixed expiration date. Only the premium (i.e., the price to be paid by the purchaser of the option) and the transaction costs are not fixed. The Options Clearing Corporation (OCC) assumes certain rights and obligations of the purchaser and writer of listed options; the writer is contractually bound only to the OCC and the owner may look to the OCC for performance if he or she elects to exercise the option.

Unlisted options are traded over the counter and have no fixed elements; the number of shares covered, striking price, premium, and expiration are all negotiable between the writer and purchaser. There is no intermediary organization (such as the OCC); therefore, the writer and purchaser remain tied together in a contractual relationship.

For the definitions of equity and nonequity options, see Q and Q respectively.