Get fresh market insights when you want them. Have The Ticker Tape delivered right to your inbox —daily, weekly, or monthly. Like spinach, IRAs individual retirement accounts are consumed by millions without too much thought. Considered too restrictive, the accounts are often shunned by active investors and options traders.
But like your excellent downward dog, self-directed IRAs can be more flexible than you think. At least not in an IRA. Assuming you were looking at January options and are approved to trade spreads in your IRA, your trade might be to sell the XYZ January strike call and buy the XYZ January strike call to create a short-call vertical.
This trade could be placed for a net credit minus transaction costs much like the naked-call trade you originally had your heart set on. By purchasing the distant strike call at the same time, you create a defined-risk position that takes in nearly the same amount of premium as the unlimited risk position.
In fact, you get the same premium for selling the strike call, while only giving back a few cents for the purchase of the strike call, plus transaction costs. By replacing the short-naked call position dash line in graph with the short-call vertical, you limit your risk and may come close to the same credit received on the short-naked call.
For illustrative purposes only. Not a recommendation of a specific investment strategy. While selling the strike put may bring you a worthwhile premium, it can hurt to have to pay up, in case the stock goes to zero. One way to limit the required funds to sell a cash-secured put is to help out the position by also purchasing a deep out-of-the-money put—something like a strike put.
Assuming you were looking at January options, your trade might be to sell the XYZ January strike put; and buy the XYZ January strike put to create a short-put vertical. Being so far out of the money, the strike put is likely to be trading for a dollar or less. Given the hefty potential premium fetched via the sale of the strike put, having to pony up about a buck, for the strike put plus transaction costs seems like a small price to pay, to make the sale of the strike put more affordable.
Turning the short put into a short-put vertical gives you a similar bang for a smaller buck. This one is fairly clear cut. You need a standard margin account to sell stock short —a strategy that makes money as the stock goes down in price—and an IRA does not allow trading on margin or selling stock short. So how can you take advantage of a stock that you think could be heading lower for a sustained period of time?
You could buy a put option. The average at-the-money option moves at about half the speed of its corresponding stock. If one of something gives you half of what you want, buy two to get the desired result, right? An at-the-money option moves at half the speed of stock because it generally has a 50 delta , meaning it tends to change in value at about half the pace of its underlying stock. That being the case, two at-the-money options would theoretically combine for a delta of , thereby creating a position that should hypothetically move one-to-one with the stock.
Trading in an IRA naturally has pros and cons. While you can actively manage your portfolio and it allows for earnings to grow on a tax-deferred basis, strategies can be limited by various margin restrictions on certain positions.
Fortunately, you can utilize some basic option trades that come close to accomplishing what you need with the strategies discussed here. In an IRA, keep in mind creative options strategies exist if you qualify. If it feels right, consider taking your retirement portfolio beyond its current breakfast menu and trade it outside the cereal box.
The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy. Stop Signs, Schlop Signs: Create a Stock Momentum Tool with a Twist.More...