Naked Option Strategies in Your IRA

There can be some debate about the wisdom of pursuing naked option strategies within your IRA. Legislation does not allow for the use of naked options within these. However, by covering the options with cash or stock it is still possible to trade. There seems to be some worth in pursuing the objective, reasons for which are explored below. Do bear in mind, however, that authority has to be sought from your broker to allow you to trade. Controls are included as to the level of risk that can be undertaken.

Using cash to secure your naked options

This is the most straightforward method for traders who are used to trading naked options in their retail accounts. Taking the example that you look to trade your option at a strike of $20 dollars, the legislation requires that you are able to buy 100 shares at that strike. Thus, provided you have $2000 cash in your IRA, you can take advantage of the benefits (and of course expose yourself to the risks) of that investment strategy. In retail accounts, brokerage firms enforce that you to keep a margin balance in your account, for more details on margin accounts read: /Options-Margins/

High Margin of Return

The main potential advantage of using a naked option in your IRA (having, as explained above, ensured it is sufficiently backed by cash or stocks) is that there is the potential to realise a substantial margin in your return. However, as with all investment, the higher the return the riskier the manoeuvre. It is therefore important, especially in something as central to your life as your retirement fund, to investigate and decide upon a properly defined risk strategy. There are various methods available to do this. One of the more common is to utilise the iron condor.

Use of the Iron Condor

Making use of the iron condor is a strategy to help you manage the risk of your investment. Depending on whether your options are put or call versions, the Iron Condor will still offer insight on the level of risk against potential return of your investment.

Spread the Risk

Depending on the significance of your IRA to your post work lifestyle, you may wish to spread risk. This gives the potential to both make gains on your options, but to maintain more certain security with a portion of your investment. Thus, taking up naked options on the stock market offers the high risk/reward aspect of your investment, whilst a commitment to, for example, bonds and fixed income strategies will underpin the more variable aspects of your investment.

Covered Call Options

These work in similar ways to cash covered puts. With a covered call, the stock is bought and from this the facility is there to sell call options. In terms of return, there are similarities with cash covered options. Both will result in profit is stock at least maintains its values, even better if it increases. However, losses are incurred if the value falls.

Tax Advantages versus Restrictions

Although many investors immediately write off the thought of investing in their IRA because of the legislative restrictions, this overlooks the tax advantages that can accrue. Whilst it is true that in the use of naked options means leaping through some hoops, they can be quite properly adapted to allow their use.

Make Use of Multiple IRAs

Whilst managing a number of IRA accounts can be intricate, it is permitted, and allows a clear way to spread the risk of your investments, including any adapted naked options.

Know Your Broker

This is very important. Some brokers will restrict in what they will allow trade. Therefore, if your plan is to make use of naked options – whether puts or calls – it is necessary to ensure that you are permitted to do this. The best option is to discuss your strategies with your broker and consider their feedback.

In conclusion, with a little research and sufficient cash or stock reserves to cover your naked options, there are good reasons for pursuing this strategy.