Puts & Ladders for Your IRA

A buy and hold strategy may be good for long-term investments. Bit when circumstances change, a long-term strategy may not be flexible enough. Laddering puts across price and time could help when stock markets are volatile.

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5 min read
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Key Takeaways

  • Learn how to ladder puts in your IRA to better manage risks
  • Know different ways to ladder puts in your retirement portfolio
  • Laddering  puts can help to diversify portfolio risks by price, time, or both

What’s exciting about buying and holding for the long term regularly investing a certain amount, and periodically checking your balance? Not much. In fact, many investors and traders consider their retirement accounts to be in that “traditional buy-and-hold” category. And although slow and steady may win the race, markets aren’t always slow and steady.

You can never predict when a market might turn south, so even in an IRA, you might consider managing entry points through the laddered selling of puts as opposed to buying the stock outright. And yes, this does fall under the “can-do” list for an IRA. But you’ll need to be qualified to trade options in your account. And you’ll need to have enough cash available in the account to buy the stock should you be assigned on a short put. That’s why this strategy is described as selling “cash-secured” puts.

The Puts-For-Accumulation Strategy In a Nutshell

Suppose you’re eyeing a purchase of 300 shares of FAHN—a high-flying stock you want to add to your retirement portfolio that’s trading at $174 per share. You expect the stock price to move up based on your “go-to” technical or fundamental indicators, or anything else you rely on. But as a highflier, FAHN is quite volatile, and you’re not sure you want to go all in at that one price.

When you sell a put option (and remember one options contract usually controls 100 shares of stock), that put has one strike and one expiration date. If the stock price stays above the strike price through expiration, you’ll likely get to keep the premium you collected when you sold the option. If stock price goes below the strike price prior to or at expiration, and you don’t close the position or roll it to another expiration date, you’ll likely be assigned and end up purchasing shares of the stock at the strike price when the market price of the stock is probably lower. Remember: a short option can be assigned at any time prior to or at expiration, regardless of the in-the-money (ITM) amount.

But if your strategy is to accumulate shares of FAHN (or make a little money from a rally in the shares), you meet your objective either way by selling a cash-secured put.

Laddering takes the cash-secured put strategy and spreads it over different strikes and/or expiration dates. So, if your target is 300 shares of FAHN, you could build a ladder made up of three options contracts.

But First, the Asterisks

Before getting into building the ladder, there are a few things to note about this strategy. First, although a short put is technically a bullish strategy, there’s a limit to your upside exposure. You keep the premium (minus transaction costs), and that’s it. It doesn’t matter how high FAHN might rally. Plus, because you don’t own the shares, you have no voting rights, nor are you entitled to any dividends FAHN might pay.

There’s also downside risk. If FAHN gets hammered, the meter keeps running on your exposure. Once a put is deep ITM, it essentially moves one-to-one with the stock—all the way to zero, if that should happen.

Building the Ladder

There are different ways to ladder puts in your portfolio. You could sell puts across different time frames and strikes at the same time. Or, you could scale in by selling one, and then—depending on how things go—before the first contract expires, you could add more. Anytime an option expires out of the money (OTM), you could add another.

Let’s review how you could ladder three puts on your stock. Suppose the stock you’re considering has been in a trading range for some time. It starts trending higher and moves above an exponential moving average (EMA) you follow (see figure 1).

chart showing price break out

FIGURE 1: MAKING A MOVE? After hanging out in a trading range for a few months, the price looks like it may break out above that range. Chart source: the thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

On the thinkorswim® platform from TD Ameritrade, select the Analyze tab and look at the different option chains (see figure 2). 

chart showing how to select option strategies

FIGURE 2: THE THREE RUNGS. From the Analyze tab on thinkorswim, look up OTM puts in the Option Chain. Select puts that have a risk/return you’re comfortable with and a relatively high probability of expiring OTM. Chart source: the thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Say the stock is trading at $144 and the EMA is at around 139. From the Option Chain, based on the expected move and a relatively high probability of the options expiring OTM, you decide to sell the Dec 135 puts with 51 days to expiration. The credit for this trade minus transaction costs is $1.11.

The stock price continues moving up, so a couple of weeks later when the stock is trading at $150 with its EMA at 139, you decide to look at the deferred expiration dates. Once again, based on the EMA, expected move, and relatively high probability of expiring OTM, you decide to sell the Jan 140 puts with 63 days to expiration. You collect $1.20 for selling the puts.

A few weeks later, the stock pulls back to its EMA at around 146, but then continues moving up. With the stock trading at around $152 and EMA at 147, you decide to go out further to the February contracts. Analyzing the data, you decide to sell the Feb 140 puts for a $1.83 credit. These puts have 77 days to expiration.

Figure 3 shows the three trades that make up the put ladder in this example.

FIGURE 3: VISUALIZING THE LADDER. Marking the levels of the different puts on a price chart could help you monitor and manage your positions. Chart source: the thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

If the stock price remains above the strike prices through expiration, the puts expire worthless. You keep the credit, minus any transaction costs. At that point, depending on conditions, you could consider selling another put. If the stock price falls below the strike price before the put expires, you’ll likely get assigned.

By spreading out your puts over price and expiration, you have more time to manage the puts that have more days to expiration. Things can, and do, naturally change as time passes. Volatility could increase, prices could fall, and the options that made sense at the time you opened the position may no longer meet your criteria. That’s why it’s important to monitor your positions often, especially in a retirement account.

There’s No One “Right Way”

So, you could sell three puts across different strikes and expirations at the same time. You could also ladder based solely on prices or time frames. Another choice is laddering put spreads, where the long-leg strike price is lower than the short leg.

Looking at the same example, you could trade the Dec 135/130, Jan 140/135, and Feb 140/135 put spreads. Because these are spreads, you’d be collecting less premium, so your potential profits would be reduced. But your risk would also be limited. The max loss in these put spreads would be the width of the strikes, minus the credit received. Because these are $5 wide spreads, that would be a max loss of $500 (5x100), minus the premium and transaction costs for each spread.

If the stock price goes below the strike price of both puts in the spread and the puts get exercised, you’d lose the $500 (minus the credit received). You can decide if you want to buy the stock at the lower price or sell another put spread. The basic premise of laddering puts is the same as selling puts or put spreads. Yet, the laddered approach has a benefit: You diversify your risk by price, time, or both. And that helps you better manage your positions.

Because you’ve got puts with different expirations—and you could keep adding puts as time passes—it creates the opportunity to actively manage your IRA. After all, your retirement account is just as important as a short-term trading account. There’s no requirement to think of it as a traditional buy-and-holder.


Key Takeaways

  • Learn how to ladder puts in your IRA to better manage risks
  • Know different ways to ladder puts in your retirement portfolio
  • Laddering  puts can help to diversify portfolio risks by price, time, or both

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Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

Jayanthi Gopalakrishnan is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.


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