Trading our strategies in IRAs

[cwelsh]

Several people have asked if our strategies can be implemented in IRA accounts.

 

The short answer is yes, but it depends on the broker.

 

The longer answer is "not exactly as it is done on this site."  

 

First, some brokers won't allow it. This is unusual, but I have come across brokers who won't allow option trading in IRAs.  Find this out before you open an account.  Second, the rules are different.  IRAs basically can't use margin trading and everything has to be cash secured.  

 

Let's say I have 4 positions in my account:

Long 100 shares of AAPL bought at $120 (stock price at $120)

Short 1 call of AAPL at the $110 strike, sold for $5

Long 10 puts of XOM at the $50 strike bought for $10 (stock price at $60)

Short 5 puts of XOM at the $40 strike (sold for $5)

 

In a non-IRA account, enabled for margin, there will be no issue with these positions when opened.  If AAPL moves up a LOT or XOM moves down a lot, your account may go into a margin call eventually (Reg-T call), but you likely can satisfy that by closing the positions.  If you have a regular account, you may have noticed from time to time that your "available funds for trading" goes into a negative amount as positions move around.  

 

On the other hand, in an IRA, you will have to have the cash already in the account for potential losses on the trade.  So on the AAPL trade, in addition to those positions, you'll also have to have $500 in cash.  (As if the price stays above $110, you stand to lose $500).  The same goes on the put side.

 

You see this in Anchor as well.  If we have a long put at 390 and sell the 400 put, we have to have that $10/contract ($1000) on deposit in cash in an IRA, whereas in a regular account, you likely won't.  

 

 

[Kim]

But if we trade in SO and SS only debit spreads (with some rare exceptions) which are defined risk, and no margin is used, why this could be an issue?

[ixero@20]

@Kim, do you know if SS can be implemented within Canadian Registered Accounts (TFSA or RRSP)?

I tried to place "Sell to Open Covered" order in my TFSA account which has a long call position (but no stock) and iTrade didn't allow it. My account is approved for Level 2 Options trading (the highest we can get for registered accounts - long put, long call, sell covered call). I am not sure if this is a CRA rule or brokerage restriction. 

P.S. Sorry for bothering you with tax related questions lately.

Edited March 10, 2021 by ixero@20

[cwelsh]

3 hours ago, Kim said:

But if SS trades only debit spreads which are defined risk, and no margin is used, why this could be an issue?

If you ONLY do debit spreads, it would not be an issue (unless you try to trade more than you have in your account, as can be done in a margin account).  

[Kim]

1 hour ago, ixero@20 said:

@Kim, do you know if SS can be implemented within Canadian Registered Accounts (TFSA or RRSP)?

I tried to place "Sell to Open Covered" order in my TFSA account which has a long call position (but no stock) and iTrade didn't allow it. My account is approved for Level 2 Options trading (the highest we can get for registered accounts - long put, long call, sell covered call). I am not sure if this is a CRA rule or brokerage restriction. 

P.S. Sorry for bothering you with tax related questions lately.

No, they don't allow spreads at all. Here is what IB allows:

https://www.interactivebrokers.ca/en/index.php?f=13406&p=rsp

[Bullfighter]

This does indeed depend on the broker. Some brokers offer what is called "Restricted Margin" for retirement accounts, which is not a cash account. Tastytrade and TD Ameritrade do this, for example. You can trade SteadyVol and SteadyYields in an IRA at TD Ameritrade, for sure, since I have done it. Since you are doing short credit spreads, that would mean that the SteadyOptions structures would work as well. A caveat would be calendars: Schwab does a very restrictive treatment of weekly option calendars, not on monthlies, so when the move to Schwab is complete mid May, those IRA accounts (or any account, really) may have problems with calendars using weekly options in at least one of the legs.

[Jerry F]

@Bullfighter  Good to know on the TDA Schwab issue.  I trade a very large account at TDA and use calendars very frequently on weeklies.  Thanks for the heads-up.  It looks like I'll be moving even more of my trading activity away from TDA once the Schwab takeover is complete.

Regarding defined spreads, and calendars specifically, in an IRA.  Bullfighter is correct.  It's dependent upon broker.  I also have accounts at TastyTrade, including IRA accounts.  You CAN trade calendars in an IRA at TastyTrade.  In fact, you can trade any of the SteadyOptions trades in an IRA at TastyTrade.  TastyTrade has what they call "IRA the Works", which is a limited margin account.  You can do anything except short stock, sell naked PUTS, or do anything with crypto.  

[cwelsh]

44 minutes ago, Jerry F said:

@Bullfighter  Good to know on the TDA Schwab issue.  I trade a very large account at TDA and use calendars very frequently on weeklies.  Thanks for the heads-up.  It looks like I'll be moving even more of my trading activity away from TDA once the Schwab takeover is complete.

Regarding defined spreads, and calendars specifically, in an IRA.  Bullfighter is correct.  It's dependent upon broker.  I also have accounts at TastyTrade, including IRA accounts.  You CAN trade calendars in an IRA at TastyTrade.  In fact, you can trade any of the SteadyOptions trades in an IRA at TastyTrade.  TastyTrade has what they call "IRA the Works", which is a limited margin account.  You can do anything except short stock, sell naked PUTS, or do anything with crypto.  

On Schwab, I can trade level one and level 2 options (such as diagonals) in IRA accounts on the institutional side (e.g. for my investment clients).  HOWEVER, they have to be cash secured.

 

So if I open a 100-110 vertical spread, then I have to have the $10 in the account (which can be in something like SGOV).  It's basically margin lite.

 

I do trade Anchor in IRA accounts on Schwab, but the cash reserves are different than normal margin accounts.