IRA

[BillP 0]

Kim, since I am trading in a Ira account can all your trades be done in an Ira account? Thanks

[cwerdna 12]

It depends on what sort of options trading your brokerage allows in an IRA. It's generally far more limited since AFAIK, IRA accounts can't be margin accounts.

[Rogers 263]

I am happy that my broker does not allow options trading in my IRA account.

[BillP 0]

If I didn't trust the trade enough to trade it in my Ira then I would not be taking the trade

[cwelsh 1,499]

IRA's will let you do some of these trades, depending on your broker. You almost certainly should be able to do straddles, as they don't require margin. IC's on the other hand probably require special authorization, and, depending on the type of IRA, may not be allowed at all due to the margin requirements.

[cwerdna 12]

To elaborate on my earlier response, w/my TOS account, here are the only two choices I get for my IRA. It is by definition only a cash account. It can't be margin.

Tier 1:

• Covered call writing
  
• Cash-secured put writing
  

Tier 2:

• Covered call writing
  
• Cash-secured put writing
  
• Purchase of calls and puts
  

There's no tier 3.

For regular accounts, they have choices of cash or margin accounts. For cash accounts, it's just the above 2 tiers. For margin accounts, there's a 3rd tier: tier 3 (advanced). It allows:

• Covered call writing
  
• Purchase of calls and puts
  
• Trading qualified spreads
  
• Uncovered call and put writing
  

[cwelsh 1,499]

That's what I have -- so in a tier 2 IRA account you can trade most of these earnings trades -- the one's requiring straddles, as that is a double long (long call long put).

However, you won't be able to particpate in some of the higher priced ones, as we typically use IC's for those. Further, it limits your ability to adjust to a trade going wrong by converting one to an IC.

Depending on what you can convince them of, you might get clearance for IC's in your IRA as they are still hedged transactions (and can even be cashed secured, eliminating margin requirements). I have mine setup that way, but it took an in person meeting and some bickering at an office of theirs.

[Rogers 263]

I might try and get tier 2 options on my IRA account. Right now I use FAZ to hedge but SPY LEAPS might be cheaper.

[Rogers 263]

On the same topic. Does anyone here use puts to hedge retirement funds? I would think you would use puts to provide plunge protection (deep OTM)?

[cwelsh 1,499]

On the same topic. Does anyone here use puts to hedge retirement funds? I would think you would use puts to provide plunge protection (deep OTM)?

I already have a post on this floating somewhere -- but yes, I use a put strategy to protect retirement funds in my (and familys) IRAs. However, I use the strategy of using ATM Puts and selling more than you have -- see:

http://seekingalpha.com/article/294670-hedging-spy-with-options-part-3

This has worked stunningly well. I also pick SPY dividend aristocrats only to invest in -- and am picky on those. Another modification I used was going two years out on the SPY puts, instead of one as advocated in the article. At the time I did it, that made the weekly payment I needed drop almost 40%. (Obviously that varies). At the current rate, I'll have the entire hedge "paid for" with about 6-7 weeks to spare.

[Rogers 263]

awesome.. thanks Chris..

that might be too much maintenance for me. I will most likely just have some deep OTM puts for plunge protection and covered calls on dividend paying stocks for an income stream.

Edited July 10, 2012 by Scott Rogers

[Rogers 263]

I wanted to use OTM put spreads to hedge my long funds but level 1 doesn't allow spreads so I had to use single OTM puts. I am looking at Jan 13 120 puts that I will roll at EOY to Jan 14. Also building a basket of high dividend stocks that I will sell calls against (covered calls). I should be able to sell two calls a year on each stock.. The ideal scenario is that the stocks are range bound and I can collect the dividend (avg 5%) plus collect the money from selling the calls (another 5% or so).

[cwelsh 1,499]

awesome.. thanks Chris..

that might be too much maintenance for me. I will most likely just have some deep OTM puts for plunge protection and covered calls on dividend paying stocks for an income stream.

If you don't like "that" much maintenance (not like its that much, just have to do something every thursday or friday), then you can still use the LEAP / monthly sells -- won't quite pay for the whole thing, but it's much closer. (And if I know I'm out of town and won't be able to adjust, then I just switch to a shorting a monthly, works great).

[Rogers 263]

If you don't like "that" much maintenance (not like its that much, just have to do something every thursday or friday), then you can still use the LEAP / monthly sells -- won't quite pay for the whole thing, but it's much closer. (And if I know I'm out of town and won't be able to adjust, then I just switch to a shorting a monthly, works great).

I can only get level 1 options on my IRA account which means no option sells (except for covered calls)

Edited July 13, 2012 by Scott Rogers

[cwelsh 1,499]

This is a form of a covered call -- you should be long something like 10 puts and short each week 3-4 puts. Those shorts are more than covered by the long position.

And as an update to the strategy. I launched with real money on March 14, 2012 (after paper trading it for a year). I bought the 140 SPY puts and sold against it. I also bought the SPY puts that were two years out -- that allowed the "cost" of the insurance to drop significantly (instead of needing about .80 a week, I only needed .55/wk).

As I previously discussed, I also only bought dividend aristocrats. Since March 14, the portfolio is up 5.56%.

Over that same time, the SPY is up 1.45%.

Most impressively, even in June, when SPY dropped into the 120s, the value of the portfolio never dropped -- it actually even increased slightly because the value of the puts went up. I am also above pace on the "cost" of the insurance, and at the current rate, it will be paid for in 18 months, giving me six more months of "free" premiums -- e.g. extra money.

Progress review:

1. In down markets, it, SO FAR, has performed just as designed;

2. In neutral markets, it, SO FAR, has perfomed just as designed;

3. When rebounding back from market lows to the original entry point, it, SO FAR, as performed as designed.

4. It has not been tested, in real markets, in an extended bull period beyond the initial 140 levels (so if SPY ran up to 150 or 160). It should keep working, but as it has not been tested, we can't know for sure.

I'm begining to really like this strategy. I need to do some margin calculations, because, if its possible, I think it would be just SPECTACULAR, to have this running on the underlying portfolio and then, using the margin available from the long stock positions, make the IV trades. That's my new weekend project (of course won't do that in the IRA, just general account). If I can suck another 5-7% gains a year, on top of my option trading, well then I'm really happy.

[Guest DShaver]

Wow Chris, Hats off to you for confusing the ever living sh*t out of me lol. I would love if you could explain how that works a little bit more in depth with the spy puts. As I think I understood it the trade would go something like this:

buy 10 SPY Jan '14 140 puts

sell 3 (or 4) SPY weeklie 140 puts

Is that right?

What would the adjustment be if we had a long bull rally, say up to the 150-160's?

And if the market goes bearish again, say into the 120's what would you do then? still short the 140's (in this example) or short a closer strike and roll the long?

[cwelsh 1,499]

Wow Chris, Hats off to you for confusing the ever living sh*t out of me lol. I would love if you could explain how that works a little bit more in depth with the spy puts. As I think I understood it the trade would go something like this:

buy 10 SPY Jan '14 140 puts

sell 3 (or 4) SPY weeklie 140 puts

Is that right?

What would the adjustment be if we had a long bull rally, say up to the 150-160's?

And if the market goes bearish again, say into the 120's what would you do then? still short the 140's (in this example) or short a closer strike and roll the long?

Read this first:

http://seekingalpha....-options-part-3

Then let me know what your questions are .

[Rogers 263]

I am trying to come up with a better way to protect my IRA without having to use OTM puts that will most likely expire worthless. Right now I can only trade level 1 options at Schwab (calls,puts,covered calls) and cannot short options so I am limited in what I can do. Any suggestions?

[cwelsh 1,499]

Yes, read the above article, but here's the essence of it.

Let's say your IRA has $50,000.00 in it. With the current SPY price of 142, it would take 3.5 puts ATM to protect it, or 4. The September 2013 142 puts are trading at a midpoint of 10.52. Buying four would cost you $4,208.00. But you don't want that cost (almost 10% of the portfolio), so you buy an extra 25%, so you are now buying 5 puts, which cost you $5,260.00.

Well there are 56 weeks remaining between now and the September 2013 expiration. That means you need $96.92 per week to "pay" for the entire hedge (let's say $98.00 to cover commissions). So you need to gain at least $0.98 each week, selling that "extra" put short.

If that's too high (which I think it is), you could sell an extra put, putting you at long 6 SEP 13 142, which would cost $6,312, and gives you 2 puts to short each week. You only need 0.56 to cover that -- which is easily doable.

So, every week, sell two puts short, against your 6 long, gaining at least 0.56 a week, and you have a "free" hedge.

Of course there are needed adjustments, but the article does discuss those. Adjusting as the price drops or stays the same is relatively simple. Adjusting in a bull market is a little more complex, because you keep having to move all six puts up, but it is doable as well.

Make sense?

[Rogers 263]

Yes, read the above article, but here's the essence of it.

Let's say your IRA has $50,000.00 in it. With the current SPY price of 142, it would take 3.5 puts ATM to protect it, or 4. The September 2013 142 puts are trading at a midpoint of 10.52. Buying four would cost you $4,208.00. But you don't want that cost (almost 10% of the portfolio), so you buy an extra 25%, so you are now buying 5 puts, which cost you $5,260.00.

Well there are 56 weeks remaining between now and the September 2013 expiration. That means you need $96.92 per week to "pay" for the entire hedge (let's say $98.00 to cover commissions). So you need to gain at least $0.98 each week, selling that "extra" put short.

If that's too high (which I think it is), you could sell an extra put, putting you at long 6 SEP 13 142, which would cost $6,312, and gives you 2 puts to short each week. You only need 0.56 to cover that -- which is easily doable.

So, every week, sell two puts short, against your 6 long, gaining at least 0.56 a week, and you have a "free" hedge.

Of course there are needed adjustments, but the article does discuss those. Adjusting as the price drops or stays the same is relatively simple. Adjusting in a bull market is a little more complex, because you keep having to move all six puts up, but it is doable as well.

Make sense?

For me it does but I currently can't sell options unless I own the stock.. I will see if chuck will give me level 2 options trading in my IRA account. thanks

[jr1221 12]

I've studied this method quite a bit and the flaw is that it assumes the underlying won't move much. As mentioned above, if the underlying moves down, you can do pretty well. but if it moves up, you can't continue to collect the amount of premium you originally planned for unless you alter your strikes. And if you don't move the long strikes along with the short strikes, you have to use some margin and of course some risk that you wouldn't want on a retirement portfolio. Sure you can move the long puts as well but I could see the management of this being commission consuming and frustrating if you keep getting caught up in the normal fluctuations of the market. I'd love to find a great way to protect the retirement portfolio but would need some help with structuring the trading plan for it. I also considered a method like this to protect my GLD LEAPS but, the way GLD moves unpredictably each time Bernanke speaks, it's hard to manage the trade without potentially locking yourself out of the originally intended gains you planned for.

[Rogers 263]

Can you do a cover call on an ETF? I am playing with the idea of buying a levered short ETF like SDS or FAZ and selling the calls every month to subsidize it. That might be an alternative for someone that can't sell calls unless they own the stock.

[Marco 221]

if I don't want to hand pick a long stock portfolio is there some sort of dividend aristocrats ETF?

[cwelsh 1,499]

I've studied this method quite a bit and the flaw is that it assumes the underlying won't move much. As mentioned above, if the underlying moves down, you can do pretty well. but if it moves up, you can't continue to collect the amount of premium you originally planned for unless you alter your strikes. And if you don't move the long strikes along with the short strikes, you have to use some margin and of course some risk that you wouldn't want on a retirement portfolio. Sure you can move the long puts as well but I could see the management of this being commission consuming and frustrating if you keep getting caught up in the normal fluctuations of the market. I'd love to find a great way to protect the retirement portfolio but would need some help with structuring the trading plan for it. I also considered a method like this to protect my GLD LEAPS but, the way GLD moves unpredictably each time Bernanke speaks, it's hard to manage the trade without potentially locking yourself out of the originally intended gains you planned for.

It actually does work well in up markets, in backtesting anyways, you just have to proactive. What you end up doing is, lets say you have the Sept 2013 142 puts and over the next three months SPY runs up to 150. Well what you would do is then roll to the DECEMBER 2013 150. In the typical situation IV would have dropped, making the price of the 150 small relative to what you bought the 142 at. You then just sell against this. Again, while I haven't had to put this into practice yet, I did do a three year backtest on it, and it worked just fine.

Yes you pay commissions, but hopefully you have a good commission structure. I would not do this on a portfolio of anything less than $50k.

It has the added advantage of continually adjusting your floor. Basically, a permanent high water mark.

Is it perfect? Absolutely not, in times of rising markets, I EXPECT somewhere between 2-5% of slippage. But that's why I only buy dividend stocks, to help cover that. I also am willing to lag behind a bull market by 0-3% (remember the dividends) to not have down years. Go look over the markets 10 year histories. If I consistently lag bull markets by as much as 5%, but never have a down year of more than 2%? Other than the period of about 1994-2000 you would absolutely destroy the market returns over the long hall. And ideally I can only lag the market by 1-2%.

Anyways, just my opinion.

[cwelsh 1,499]

As a brief follow up, this strategy does NOT work with GLD, USO, etc -- the commissions aren't enough on the selling short side

[cwelsh 1,499]

Can you do a cover call on an ETF? I am playing with the idea of buying a levered short ETF like SDS or FAZ and selling the calls every month to subsidize it. That might be an alternative for someone that can't sell calls unless they own the stock.

If there's options on it yes. I've never looked into this strategy though, sounds interesting.

[Rogers 263]

If there's options on it yes. I've never looked into this strategy though, sounds interesting.

Trying.. It will be hard to produce enough of a hedge without using a large portion of my funds..

[Rogers 263]

Just realized I can move my 401k into an AMTD account for self directed investing How much do I trust myself....

[cwelsh 1,499]

Just realized I can move my 401k into an AMTD account for self directed investing How much do I trust myself....

Even with self directed investing,there are limits on option levels -- I looked into that once before, and you still can't trade naked options, or at least I never found a custodian that would let me

[Rogers 263]

Even with self directed investing,there are limits on option levels -- I looked into that once before, and you still can't trade naked options, or at least I never found a custodian that would let me

I don't plan on doing any of that.. It would be more of what I have in my IRA which is mostly covered calls on income generating stocks.

[ttselva 1]

I am planning to open IRA account with interactive brokers.. Anyone has IRA with interactive brokers?  The following from their website concerns me:

 

- If the exercise or assignment of an option results in the delivery of either a long stock position for which the account does not have sufficient cash to purchase (e.g., call exercise) or any short stock position (e.g. put exercise) the account will be subject to liquidation.

 

I am not sure what the liquidation means?  Does it mean my account will be closed? 

 

Thanks in advance.

[Marco 221]

I am planning to open IRA account with interactive brokers.. Anyone has IRA with interactive brokers?  The following from their website concerns me:

 

- If the exercise or assignment of an option results in the delivery of either a long stock position for which the account does not have sufficient cash to purchase (e.g., call exercise) or any short stock position (e.g. put exercise) the account will be subject to liquidation.

 

I am not sure what the liquidation means?  Does it mean my account will be closed? 

 

Thanks in advance.

The account won't be closed but they will be closing positions (sell long positions and/or cover short positions)

[ttselva 1]

Thanks, Marcos.

[Gary 20]

This is a neat idea thanks for sharing.