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Author: bellgarde Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121169  
Subject: IRA's and Option trading Date: 6/21/2007 6:21 PM
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Hi, Is this permissible?
Bill
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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 94963 of 121169
Subject: Re: IRA's and Option trading Date: 6/21/2007 6:34 PM
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For the most part, no.

I think covered calls are OK.

--Peter

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Author: billjam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 94964 of 121169
Subject: Re: IRA's and Option trading Date: 6/21/2007 6:54 PM
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<<<For the most part, no.

I think covered calls are OK.

--Peter >>>

Without taking the time to research this, I'll ask why not? You can't trade on margin in an IRA, which option traders often like to do. But why can't you buy and sell Puts and Calls on a cash basis in an IRA brokerage account.


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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 94965 of 121169
Subject: Re: IRA's and Option trading Date: 6/21/2007 7:11 PM
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>> For the most part, no.

I think covered calls are OK.
<<

Buying protective put options are OK, too.

#29

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 94966 of 121169
Subject: Re: IRA's and Option trading Date: 6/21/2007 7:26 PM
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Without taking the time to research this, I'll ask why not? You can't trade on margin in an IRA, which option traders often like to do. But why can't you buy and sell Puts and Calls on a cash basis in an IRA brokerage account.

If your account allows it, options may be bought/sold on a cash basis in an IRA account. However, since some options trades could result in requiring more cash/liquid securities to cover the option than the account has, and adding cash to an IRA account beyond the contribution limits for the year is prohibited, some account administrators do not allow any options trading. If you are interested in trading options in your IRA, you need to make sure that it is allowed in your account.

From the Chicago Board of Exchange website ( http://www.cboe.com/institutional/irakeogh.aspx ):
IRAs and Keogh Plans are subject to prohibited transaction rules contained in the Internal Revenue Code, which also apply to other qualified retirement plans.28 These rules generally prohibit an owner or beneficiary from using the assets of the account or plan for any purpose other than investment for the benefit of the owner or beneficiary. (For example, the assets cannot be borrowed by the owner or invested with the owner's company.) Likewise, transactions between the account or plan and a "disqualified person"29 (including the owner/beneficiary, owner's/beneficiary's family, and other related parties) may result in tax penalties and potential loss of special tax status of the account or plan.30

The purchase and sale of options in the open market are not prohibited transactions. However, Internal Revenue Code prohibited transaction rules prohibit the IRA or Keogh Plan account holder from loaning money to the account. Likewise, the holder cannot guarantee borrowing by the account or cover its losses. Furthermore, annual contribution limits restrict new money that can be put into an account. Therefore, any option strategy that could result in losses that could not be covered with cash or by the sale of liquid securities held by the account or by amounts which can be contributed to it within permitted levels should be strictly avoided. Otherwise, it would not be possible to cover account losses without committing a prohibited transaction or over contributing to the account, both of which result in unfavorable tax consequences, including the potential of tax penalties.

In the event an IRA or Keogh Plan account holder pursued the strategy of writing calls on a cash-settled index option, such as writing a call based on the Dow Jones Industrial Averagesm (ticker symbol "DJX"), and was assigned, the Internal Revenue Code does not consider the settlement debit to the account to be a distribution or withdrawal. However, as noted above, the IRA or Keogh Plan should strictly avoid this strategy if the account does not have sufficient cash or liquid securities to cover any losses, or the beneficiary is prevented from contributing additional monies to the account due to annual contribution limits.


AJ

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 94967 of 121169
Subject: Re: IRA's and Option trading Date: 6/21/2007 7:30 PM
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>> If your account allows it, options may be bought/sold on a cash basis in an IRA account. However, since some options trades could result in requiring more cash/liquid securities to cover the option than the account has, and adding cash to an IRA account beyond the contribution limits for the year is prohibited, some account administrators do not allow any options trading. If you are interested in trading options in your IRA, you need to make sure that it is allowed in your account. <<

Which means that at minimum, writing covered calls and buying protective puts should be acceptable since you already own the underlying securities. The caveat here is that you wouldn't be able to liquidate your long positions until you closed out the options.

#29

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Author: trepanne Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 94968 of 121169
Subject: Re: IRA's and Option trading Date: 6/21/2007 7:31 PM
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Without taking the time to research this, I'll ask why not? You can't trade on margin in an IRA, which option traders often like to do. But why can't you buy and sell Puts and Calls on a cash basis in an IRA brokerage account.

you can buy whatever options you wish, as long as your broker approves. the holder of an option has strictly limited downside, so there is no conceivable need to borrow money no matter how horribly the position moves against you.

selling options is a different matter, because your downside is unlimited, so huge adverse moves could put you in hock to the house.

if your broker approves, you can sell covered calls against stocks you own, because you can meet the call in kind when exercised against you (presumably the same logic would hold true for futures; i.e. you could be long the cash instrument & short the call... but you'd have to put up full margin for the underlying, so i can't imagine people would want to do this.)

selling puts is difficult in a cash account such as an IRA, because to hedge that you need to be short the underlying... and taking short positions requires borrowing privileges, because (again) the downside is unlimited. so you can only sell puts if you reserve cash equity in the amount of the total exercise cost, and ordinarily there's very little point in that.

however, you can set up various types of options spreads in a cash account, if the brokerage approves you... and they like to approve, because spreads generate lots of commissions.

if you just can't get enough action in your taxable accounts, and you need to exotic risks with your retirement funds too, these guys would be more than happy to provide you loaded firearms to play with:

http://www.interactivebrokers.com/
http://www.optionsxpress.com/

trp

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Author: bellgarde Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 94969 of 121169
Subject: Re: IRA's and Option trading Date: 6/21/2007 8:14 PM
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Thanks to your prompt responses to my question.

Bill

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