Just like selling a call against long stock,
you can sell a call in a closer expiration
against that long LEAPS call and have it
“covered,” just as if you bought stock. Just
like the covered call with stock, the covered
call with the LEAPS reduces the breakeven
point of the LEAPS and can generate profit if
the stock price rallies. Guess what? You can
do all this in an IRA.
2. Bearish strategy with verticals
You think a stock’s going down? Shorting the
stock—selling the stock without owning it
first—is a traditional bearish strategy that can
indeed be profitable if the stock drops. But
remember, you can’t short stock in an IRA.
What’s an alternative bearish strategy?
A short call vertical composed of a short
out-of-the-money (OTM) call and a long
further OTM call is also a bearish trade and
allowed in an IRA. For example, if you were
bearish on the NDX at $6,800, a short call
vertical could be short a 6900 call, and long a
6910 call. Let’s say you take in a $5 credit for
doing that trade. That short call vertical has
a max potential profit of $500 if the NDX is
below $6,900 at expiration, has a breakeven
point of $6,905, and a max loss of $500, if
NDX is above $6,910 at expiration (not including commissions).
The downside to a short call vertical? It
has limited profit potential (Figure 2). Even
if the price of the stock goes to zero, the max
possible profit is limited to the credit you get
for selling the vertical. Now, that’s less than
what you might make on short stock, but the
short call vertical has defined, maximum risk
no matter how high the stock or index rallies.
That’s why the short call vertical is allowed
in an IRA, while short stock, or short naked
calls, are not.
3. Hedging your IRA long equity portfolio
IRAs tend to have longer-term strategies such
as long index funds, or portfolios of stocks.
And although you may have a long-term bullish market outlook, there are times when you
might be concerned about a potential selloff
that could hurt your IRA. You don’t necessarily want to liquidate your long positions. But
if you’d like to hedge them, consider a long
index put vertical. Yes, you could potentially
sell OTM call verticals in an index. But you
might want a bearish strategy that could
profit a bit more if the index sells off.
For example, with the NDX at $6,800, a
long put vertical that might hedge a long
portfolio would be long a $6,820 put, and
short a $6,770 put. If that vertical had a $21
debit, the cost per vertical would be $2,100.
That’s the long put vertical’s max risk, too, if
the NDX was above $6,820 at expiration.
But if the market crashed and the NDX
dropped sharply, the max potential profit
on that long put vertical is the difference
between the strikes ($50), minus the debit
($21), or $29, if the NDX is below $6,770
at expiration. That would be $2,900 of potential profit to offset the loss on your long
portfolio (not including commissions). So,
this long put vertical potentially has more
“hedging power” than a short call vertical.
But how many put verticals would you
buy? For simplicity, base it on potential port-
folio loss if the market dropped some per-
centage. For example, if your IRA had a value
of $50,000, and you thought the market
might drop 10%, that could create a $5,000
loss. If the NDX dropped 10%, the max profit
on that long put vertical is $2,900. One NDX
put vertical would offset more than half of
the portfolio loss. Using one single index
vertical will have lower commissions and
execution costs than alternative hedges, such
as buying many verticals on each of the IRA
components or lower-priced index ETFs, or
even multiple short index call verticals.
See? There’s a lot you can do in an IRA.
As long as you manage your risk, watch out
for commissions, and keep the long term
in mind, options might be able to help you
jump-start your retirement savings.
If you like the sound of options, but your
retirement assets are in a 401(k) that doesn’t
allow any options trades, consider rolling that
401(k) into a TD Ameritrade IRA and keep it
tax-deferred. Then you can take advantage of
all the tools and know-how TD Ameritrade
provides. Just keep in mind that not all traders qualify for options trading.
FIGURE 2: Short call vertical. For illustrative purposes only.
SHORT CALL VER TICAL
Thomas Preston is not a representative of
TD Ameritrade Inc. The material, views, and opinions expressed in this article are solely those of
the author and may not be reflective of those held
by TD Ameritrade, Inc.
For more on the risks of trading and trading
options, see page 37, #1– 2.
To get more information about trading
in your IRA, visit https://www.tdameri