Tips When Trading Options In An IRA Account | Option Alpha (2024)

With more than 32k option traders in our program now, I can tell you honestly that I've seen just as many 7-figure IRA accounts as I have 7-figure margin accounts in the last eight years. Many new traders think that trading options in an IRA account limit your ability to make money and generate income. They hear stories about all the "restrictions" brokers place on new accounts that prevent you from making high probability trades and quit before actually learning how to work within the system.

But does trading in an IRA account vs. a traditional margin make or break successful traders? Given all of the favorable tax advantages that an IRA account has, it'd be rash to write them off as you start or continue your career trading options. Yet, that's what most traders do. They blindly assume that margin accounts offer the best opportunity to make money. And although brokers restrict certain activities by law, the reality is that using your IRA account for options trading can be incredibly beneficial.

Key Points from Today's Show:

• The ability to trade in your IRA is really great and gives you a lot of leverage in the future to grow your account — do trade a little bit differently than regular margin accounts.

• IRA accounts are tax deferred for capital gains and dividends, but have restrictions on how much money you can make and how much you can put into your IRA account.

• Everything that you can do in a margin account, you can do as a risk-defined counterpart in an IRA account — convert strategies into their risk-defined counterparts so that they are permitted.

• You cannot borrow or trade on margin with your IRA account, however you can do these trades on a cash-secured bases in some cases.

• When trading in an IRA account, everything has to be risk-defined or cash secured, so you can go above that limit if needed, compensating for the fact that you can't do any naked strategies.

• One of the major restrictions in an IRA account is that you cannot short sell stock, but can trade ETFs that are double or ultra-short other securities — can have short exposure through these inverse ETs.

• When selling naked options you need to ensure that they are secured by cash or underlying stock and equity — the higher the stock price, the more cash required.

• You have the ability to open up multiple IRAs for yourself and your family — may be intricate to manage, but the benefits outweigh alternative investments.

TOP 7 IRA Account Tips:

1. Leverage your IRA accounts as much as possible

• Contribute as much money as possible every single year, funding it in chunks and intervals throughout your life.

2. Be aware of your specific broker restrictions

• Some brokers have hard restrictions of what you can and cannot trade in your IRA account, which prevents a lot of short sales, use of margin, naked puts and calls, etcetera.

• For example, Etrade and optionsXpress, or Fidelity do not allow you to trade futures in your IRA account. Interactive Brokers and TD Ameritrade have limited ability to trade futures and options. optionsXpress does not allow calendar spreads on cash-settled indexes. Schwab does not allow any options spreads at all. Think or Swim have different approval levels and level processes that you have to go through to get approval to trade different strategies [Episode 48].

3. Use a little more capital with your IRA accounts

• Should allocate up to 50-60% of equity in your account in trading, if possible, and leave 40-50% in cash, in case the market goes crazy and margin expands.
• 25-30% of your account held in cash at all times is a good starting point for where you should be — can trade more with an IRA account.

• For example, if you were to trade a naked strangle or straddle in a margin account, you would take in a higher premium and hold more of your money in cash/margin to cover that trade. In an IRA account you can convert a strangle or straddle into an iron butterfly or iron condor, making it risk-defined allowing you to trade some more contracts.

4. Trade Inverse ETFs when you can't short stock

• Want to be careful that you understand how they work and how they are priced — there is a bit of negative drag that happens with ETFS [Episode 27: Negative Drag].

• For example, TBT is an inverse bond ETF, so when bond prices go down, TBT prices go up.

5. Can sell naked options, as long as they're cash secured

• A covered call [Episode 53] — demonstrates how you can beat the market just doing covered calls, and you can do those in your IRA account as long as it is secured by the underlying shares that you own.
• Can also do a naked put option without any shares at all, as long as you're securing that put option in cash. Meaning, if you sell a naked put option for a stock at a $15 strike, that assumes that you're going to be able to buy that stock, 100 shares at $15. So you've got to have $1,500 in cash to secure that position.

6. Open multiple IRAs

• Open spousal IRA, business IRA/SEP-IRA, an IRA for your children, and get options trading approval levels for all of those.

7. Convert all strategies into their risk-defined counterpart

• Can take a strangle and convert it into an iron condor, can take a straddle and convert it into an iron butterfly, can take a short naked call/put and convert it into a credit spread.

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