Can options be sold in an IRA account?
The answer is yes and no.
The problem is that an IRA is strictly cash account. Most brokerage accounts are designed to be margin accounts, which allow customers use their brokerage account assets such as stocks, bonds, and mutual funds as collateral.
On top of this, there were additional disincentives for brokeage houses:
1) They didn’t have systems and internal controls to handle options trading in cash accounts had to be created.
2) There weren’t additional profits to be made by allowing options trading in IRA accounts.
3) Many retail investors do not understand the true risks of options trading. They throw away the disclosures from the CBOE instead of reading it carefully.
Because of this, many brokerage account have refused to allow options trading in an IRA account. However, this has changed at some brokerage houses in the last few years.
For example, OptionsXpress allows options trading as long as the strategy has a fixed downside. This means naked calls, naked puts, shorting stocks, and futures are out. However, long calls, long puts, covered calls, cash secured put writing, and spreads are allowed.
The question you have to consider is whether trading options in an IRA is a good idea.
If Obama lets the low capital gains tax expire in 2010, then IRA options trading makes a lot more sense. Taxes on profits will be deferred until withdrawal. In the meantime, your trading captial will be preserved from being eaten by taxes.
The other thing is that options trading can result in significant losses. However, 2008 proved that stocks can result in significant losses of over 40% as well. Nevertheless, options trading is very risky and may not be a good idea in IRA accounts that are needed to fund retirement.
Warning – This article should not be construed as financial, tax, legal, or other advice. It is provided for informational purposes only.