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Options in IRAs: The Final Word On What You Can Do

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September 28, 2016
trading options IRAs

Hey traders! Remember when the Department of Labor (DOL) wanted to ban the trading of options in your IRAs? Well, good news. They decided against it. Thanks to a flood of letters and all the ranting, they realized that banning trading options in IRAs wasn’t in the best interest of investors. And for good reason. A big chunk of options are traded in IRAs. So imagine the impact that could have had on not only the retail investor, but also on the entire industry.

As a self-directed investor, your goal is to manage your assets, right? The traditional model of asset management—based on the idea that investing for retirement is synonymous with long-term and slow growth—is slowly becoming a thing of the past. With the markets as volatile as they are today, all it takes is a big down day for some to lose faith in a buy-and-hold approach. For many traders, options are now an integral part of their strategy to potentially generate income and manage risk. If you feel like options may be right for you, you should learn about their potential benefits and risks before you consider adding them to your portfolio. And then there are the potential tax advantages of trading options in your IRA such as deferring taxes that your financial advisor can tell you about. All in all, the point is, you’re looking out for yourself and protecting your portfolio.

Look Both Ways

As with anything you trade, be sure to be aware of the benefits, risks, and limitations of trading options within an IRA before you get started. Then you’ll have to get approval to trade options in your IRA. In a nutshell, you can’t sell stocks short, you can’t leverage using margin, and you can’t sell naked calls or puts. So no short straddles or strangles. But what you can do, with the appropriate approval, is trade covered calls, write cash-secured puts, purchase calls or puts, and create certain spreads. This can provide you with enough flexibility to come up with some pretty creative options strategies in your IRA where you can still manage risk and potentially generate income.

So, rest assured that you can continue working on growing your nest egg. Even with the limitations on trading options in an IRA, there are several strategies that can be used. Think iron condors, calendar spreads, credit spreads, debit spreads … get creative.

Trading options involves unique risks and is not suitable for everyone.

Spreads and other multiple-leg option strategies can entail substantial transaction costs, including multiple commissions, which may impact any potential return. These are advanced option strategies and often involve greater risk, and more complex risk, than basic options trades.