IRA Option Strategies
Using appropriate options strategies in a brokerage IRA account can add extra profits to the value of the account if the strategies are successful. Not all option trading strategies can be used in an IRA account. Any strategy that requires a margin brokerage account will not work because IRAs cannot be set up as margin accounts.
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Option Authorized Account
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To use any option strategies in an IRA, the brokerage account has to be authorized for option trading by the brokerage firm. To obtain option authorization, you are required to complete additional paperwork outlining your investment and trading experience. The option strategies used in an IRA require the most basic level of option authorization and anyone with stock market investing experience can get option trading authorization on his stockbroker-based IRA.
Covered Call Writing
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Covered call trades are suitable to an IRA account. The tax deferral of gains lets you keep all of the profits this strategy can generate. A covered call involves selling call options against owned stocks. The options can be sold against shares already in the IRA, or stocks can be specifically chosen for covered call trading. Profits come from the premiums received when the options are sold and any share price increase if the stock is called at a higher price than the current value of the shares. Covered call trades can be rolled over four to six times a year and generate profits in the 15 to 25 percent per year range.
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Buying Call Options
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A strategy of buying call options can provide significant profit in an IRA account with limited downside risk. A call option may cost a few hundred and generate $100 in profit from every dollar the underlying stock increases above the selected strike price. If the stock does not go above the strike price, a call option will expire worthless and the entire amount paid for the option is lost. The IRA owner should select stocks she believes have a strong possibility of a large price gain in a period of one to six months.
Buying Put Options
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Put options increase in value if the underlying security declines in price. Put contracts can be used as insurance or a hedge to falling stock prices in an IRA. If the prices do decline, properly selected put options will increase in value at the same rate the IRA stock portfolio is losing value. To provide insurance on a diversified stock portfolio in an IRA, put options on an exchange traded fund with a similar stock portfolio can provide the desired downside protection.
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