How To Trade Spreads in IRAs

Most investors who already trade options, certainly have an idea of what spread trades are all about.

For those who are already familiar, I hear from investors about trading them in their IRA accounts.

Spread trades are a great way to generate extra income and they can also be used for speculators.   But unlike selling puts and calls, you can trade spreads in certain retirement accounts.

Here are a few strategies that are designed for bullish, bearish, and neutral market directions.

  • As a way to generate income, many clients sell naked puts on against stocks they would not mind owning.  This can be an effective income strategy, but selling put spreads can also generate income while potentially reducing risk versus that naked strategy.  If you typically sell puts and are neutral to bullish on an individual stock or ETF, consider selling out-of-the-money vertical put credit spreads to generate income.
  • It can be a bit challenging to take bearish positions in IRA accounts since trading regulations disallow shorting individual equities.  If you are neutral to bearish on an individual stock or ETF, and you’re looking to generate income, selling OTM vertical call credit spreads is a strategy available in your IRA.
  • If you think an individual stock or ETF will stay within a tight price range, look to sell iron condors as itis one of a short list of strategies that could potentially generate portfolio income.

Lower cost speculation

For clients who utilize long options for speculative reasons, there are alternatives.  Trading vertical debit spreads, instead of simply buying long options, is one way to partially offset your speculation costs (it will, however, limit your maximum gain on the trade).

As with any equity spread strategy, there is assignment risk with short options positions.  This means you could be obligated to sell shares of an equity/ ETF you may not own (in the case of short calls) or buy shares of an equity/ ETF (in the case of short puts).  So, it’s important to monitor your positions closely.  Also, keep in mind that trading option spreads in IRA accounts with different brokers will require a higher level options approval, and often-times, a minimum of $25K in account equity, and enough cash available to cover the options spread requirements.

— The Option Specialist

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