Does anyone know how options are valued for reporting purposes (1099-R) when distributed from an IRA? For example, if an IRA holding options is converted to a Roth. Any citations or guidance to refer to?

I can't give you a cite and I'm no expert in the matter, but in my opinion, it would be the difference between the strike price and the current price. I have also seen them carried at -0- or nominal value.

If these are listed and publicly traded options, what's so difficult? If not, how the heck did they get into an IRA?

Probably because someone was a very smart and sophisticated investor who had a rare and wonderful opportunity.

The valuation of standard options is pretty easily determined by looking at the last trade price in the options market. Very common options trade every day. But, some options that are far "out of the money" may not trade frequently. If you can't find the last transaction price readily, ask your brokerage to assist.

You will have a bigger issue if these are not standard issued options - that is options of a major publicly traded company. I would be surprised that a brokerage would allow you to hold such investments in either an IRA or Roth.