End of year stock-cleaning - could this method avoid the wash-sale rule?

There is only one week left to make stock-trades that will effect your 2005 taxes (although oddly there are still months to make 2005 contributions to IRAs), so this means that it might be a good time to start selling off a few loosers to offset capital gains.

But what to do if you have a stock that is loosing for the year, but that you really like and think is being overly punished by the market? Whatever you do, don't sell to take the tax-loss and then buy within 30 days - that type of transaction is called a wash sale and will negate any tax-losses you take. Also, if you re-establish a substantially similar position (buy a call option, sell a deep-in-the-money put option), you'll also trigger a wash sale (according to this article).

But what if you write an at-the money put? Would that still trigger the wash-sale rule? Take Avaya (AV) for instance. It is currently trading at $10.7, down from around $16 earlier this year (52 week high, 17.74 on Jan 5, 200). You could sell a $10 strike february 05 put for around $.25. To do this you would tie up $1,000 per contract for two months for each $25 you get in options premium so in many cases this needs to be a volume strategy.

Now,there are a few potential outcomes from this, but basically you have - option expires worthless, option gets exercised. Either way, you don't care. You like the stock, but sold it for tax reasons which means you are both willing to own it and willing to sell it.

If it expires worthless, you've just realized a gain on capital at risk of 2.5% for 2 months - about 15-16% anualized return. I'd take that.

If you get excercised into the option you now have a basis in the stock of $9.75, lower than the $10.7 you sold it for today. This is a stock you liked at $10.7, so chances are you'll like it even more 2 months from now for $9.75.

The red-herring is fees. That $25 you get could be more than eaten away if you only sold 1 contract - at my brokerage about $15 to write the contract leaving you with only $10 on $1,000 or 1% (8% or so anually). And, if you get exercised into the stock you'll likely have another $20 or so in fees thereby bringing your basis up to at least $10.05. Still less than $10.7, and still possibly getting you past the wash-sale rule. This math changes substantially in more volitile stocks (where the options are going to command a higher premium), or if you are selling more than 1 contract (with etrade each additional contract costs $3).

This shouldn't be illegal, and it shouldn't be a wash sale becasue you are closing a long position and opening a short position. But, I'm no investment tax expert. If you are, can you lend anyinsight into if this is legal or not?