in the heat of summer, “Julying” by the
beach, or maybe just cranking the AC and
taking a nap. You’d think an individual
retirement account—your good old IRA—is
the investing analogy to your dog days.
Kind of slow. Kind of lazy. But just like
getting off the beach blanket and sticking
your toe into a relatively cold ocean, a
qualified trader can perk up her retirement investing inside a TD Ameritrade
retirement account. Taking the plunge has
a few limitations. But as a qualified trader,
you can trade options, stocks, and ETFs,
and still hold whatever mutual funds your
WHY DO THIS?
Flexibility. Long mutual funds usually
found in IRAs are typically 100% long stock
or bonds. You’re in or you’re out. But if you
want to broaden your portfolio with differ-
ent strategies to potentially
increase returns and/or re-
duce risk in an IRA, read on.
For starters, the ground
rules. Retirement accounts
have certain restrictions.
Let’s look at a few things you
First, unlike in a margin
account (where you can buy more stock
than you have cash), you can’t borrow mon-
ey in an IRA to buy stock. With a margin
account, when you buy more stock than you
have cash for, your cash balance goes nega-
tive and you’re borrowing on margin. In an
IRA, this is verboten because you can’t use
IRA assets as collateral for a loan.
Second, you can’t be short stock in an IRA
for basically the same reason. When you
short stock, you are technically borrowing
the stock you don’t actually own and then
selling it. But you can’t use an IRA as collateral against borrowed stock.
Third, in an IRA you can’t be naked short
calls, because a short call has potentially
unlimited risk. What qualifies as a naked
short call? Any short call that doesn’t have
100 shares of long stock against it, or another long option in the same, or further,
expiration. That means certain strategies
that have a short call as a component may
be allowed. For example, you can sell a call
against 100 shares of long stock as a covered
call. That reduces the stock’s breakeven
and its potential profit, just as a covered call
does in a margin account.
Don’t get hung up on the restrictions. There
are still lots of strategies you can explore in an
IRA. And the nice thing about trading in your
TD Ameritrade IRA is that the risk management software will reject any trade that would
violate the rules. That means you can stay
focused on what’s possible.
YOU HAVE CHOICES
Let’s look at three IRA scenarios for trading
options. It’s not an exhaustive list, but if
you’re a qualified trader, the following ideas
can get you thinking about how to use options to express your market bias while still
following the rules.
1. Stock replacement with a covered call
Covered calls can be considered a standby
strategy for long-term bulls in an IRA who
want to reduce the breakeven point of their
long stock (Figure 1). You buy the stock for
cash and sell a call against it.
Simple. But what if the cost
of 100 shares is more than the
cash in your account? You
can’t sell a call against less
than 100 shares. Do you have
to abandon the stock? Not
Instead of buying stock
shares, you could buy an in-the-money
(ITM) long-term equity anticipation secu-
rities (LEAPS) call. LEAPS have expirations
up to three years in the future. Now, long
stock never expires. But a year out in the
future, for example, may be enough time for
the LEAPS strategy to work. A long ITM
LEAPS call that has a delta close to 100 will
approximate the risk profile of long stock
but may have a smaller price.
For example, if a stock’s price is $150,
buying 100 shares would cost $15,000. Maybe that’s too much for your IRA. But let’s
say a LEAPS call at the $120 strike is $35.
That would only cost $3,500. So the LEAPS
option also has a lower max risk than the
long stock. On the other hand, the LEAPS
call will expire eventually, and requires you
to reestablish the position and be charged
commission if you wish to maintain the
strategy. An options position also requires
more active monitoring than stock.
FIGURE 1: Covered call. For illustrative purposes only.