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My present understand is that index options are treatd as 'section 1256 contracts - market to market' [from pub 550], such that one would need to fill out form 6781 first before transfering the result to Schedule D. Also that each gains/losses per transaction is treated at 60/40 rule [60% long term/40% short term] regardless of the holding period. Is this correct?

As I understand things, that is correct.

Is the treatment of regular equity options different? Such that the regular holding period and long term/short term rule applies?

Regular equity options are diffent. Table 4-1 of publication 550 gives a nice, concise, straight-forward, clear summary of the treatment of equity options. (Never expect to see me use those adjectives in reference to an IRS document again.)

Would the knowledgable person also explain to me the straddle rule. Very confusing to me as I plow through the publication.

Thank God. If you did not find them confusing I would seriously doubt either your sanity or your intelligence.

Let me start start by giving you a reference to Kaye Thomas' answer to that question.

Second, let me advise you not to bother trying to call the IRS to get an answer to a question on straddles. I tried. After being transfered to three different people I finally got someone who was able to inform me that "We do not answer questions on straddles." Then given that the istructions for form 6781 tell you to use Temporary Regulations sections 1.1092(b)-3T(d) and 1.1092(b)-2T I asked if I could get a copy of those regulations. After being transfered to three more people I finally got someone who indicated "We usually do not get such complicated requests." but was going to help me until she talked to her supervisor who indicated I needed to get that information from the library. After checking with the public library, which did not have them, I was able to get into a private law school library to look them up. They did not help.

I think I undestand the rules well enough to answer most specific questions, but trying to summaraize them in plain language would be a hugh task. If you have specific questions I suggest you post them as answers to this post (no e-mail, please) and I will try to answer.

Good Luck,
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