OAP 056: Top 7 Tips When Trading Options In An IRA Account

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With more than 32k option traders in our program now, I can tell you honestly that I've seen just as many 7-figure IRA accounts as I have 7-figure margin accounts in the last eight years. Many new traders think that trading options in an IRA account limit your ability to make money and generate income. They hear stories about all the "restrictions" brokers place on new accounts that prevent you from making high probability trades and quit before actually learning how to work within the system.

But does trading in an IRA account vs. a traditional margin make or break successful traders? Given all of the favorable tax advantages that an IRA account has, it'd be rash to write them off as you start or continue your career trading options. Yet, that's what most traders do. They blindly assume that margin accounts offer the best opportunity to make money. And although brokers restrict certain activities by law, the reality is that using your IRA account for options trading can be incredibly beneficial.

In today's show, I'll roll through my Top 7 Tips for IRA traders to help you leverage your IRA to trade options. Plus, I'll present examples of how you can convert the undefined, or naked, options strategies that we often trade as part of our PRO and ELITE membership levels into their "IRA Approved" counterparts. Enjoy!

Key Points from Today's Show:

  • The ability to trade in your IRA is really great and gives you a lot of leverage in the future to grow your account — do trade a little bit differently than regular margin accounts.
  • IRA accounts are tax deferred for capital gains and dividends, but have restrictions on how much money you can make and how much you can put into your IRA account.
  • Everything that you can do in a margin account, you can do as a risk-defined counterpart in an IRA account — convert strategies into their risk-defined counterparts so that they are permitted.
  • You cannot borrow or trade on margin with your IRA account, however you can do these trades on a cash-secured bases in some cases.
  • When trading in an IRA account, everything has to be risk-defined or cash secured, so you can go above that limit if needed, compensating for the fact that you can't do any naked strategies.
  • One of the major restrictions in an IRA account is that you cannot short sell stock, but can trade ETFs that are double or ultra-short other securities — can have short exposure through these inverse ETs.
  • When selling naked options you need to ensure that they are secured by cash or underlying stock and equity — the higher the stock price, the more cash required.
  • You have the ability to open up multiple IRAs for yourself and your family — may be intricate to manage, but the benefits outweigh alternative investments.

TOP 7 IRA Account Tips:

1. Leverage Your IRA Accounts as much as possible.

  • Contribute as much money as possible every single year, funding it in chunks and intervals throughout your life.

2. Be Aware of Your Specific Broker Restrictions.

  • Some brokers have hard restrictions of what you can and cannot trade in your IRA account, which prevents a lot of short sales, use of margin, naked puts and calls, etcetera.

Example:

  • Etrade and optionsXpress, or Fidelity do not allow you to trade futures in your IRA account. Interactive Brokers and TD Ameritrade have limited ability to trade futures and options. optionsXpress does not allow calendar spreads on cash-settled indexes. Schwab does not allow any options spreads at all. Think or Swim have different approval levels and level processes that you have to go through to get approval to trade different strategies [Episode 48].

3. Use A Little More Capital With Your IRA Accounts.

  • Should allocate up to 50-60% of equity in your account in trading, if possible, and leave 40-50% in cash, in case the market goes crazy and margin expands.
  • 25-30% of your account held in cash at all times is a good starting point for where you should be — can trade more with an IRA account.

Example:

  • If you were to trade a naked strangle or straddle in a margin account, you would take in a higher premium and hold more of your money in cash/margin to cover that trade. In an IRA account you can convert a strangle or straddle into an iron butterfly or iron condor, making it risk-defined allowing you to trade some more contracts.

4. Trade Inverse ETFs When You Can't Short Stock.

  • Want to be careful that you understand how they work and how they are priced — there is a bit of negative drag that happens with ETFS [Episode 27: Negative Drag].

Example:

  • TBT is an inverse bond ETF, so when bond prices go down, TBT prices go up.

5. Can Sell Naked Options, As Long As They're Cash Secured.

Example:

  • A covered call [Episode 53] — demonstrates how you can beat the market just doing covered calls, and you can do those in your IRA account as long as it is secured by the underlying shares that you own.
  • Can also do a naked put option without any shares at all, as long as you're securing that put option in cash. Meaning, if you sell a naked put option for a stock at a $15 strike, that assumes that you're going to be able to buy that stock, 100 shares at $15. So you've got to have $1,500 in cash to secure that position.

6. Open Up Multiple IRAs.

  • Open spousal IRA, business IRA/SEP-IRA, an IRA for your children, and get options trading approval levels for all of those.

7. Convert All Strategies Into Their Risk-Defined Counterpart.

  • Can take a strangle and convert it into an iron condor, can take a straddle and convert it into an iron butterfly, can take a short naked call/put and convert it into a credit spread.

Option Alpha Podcast Show Notes[FREE Download] Podcast Show Notes & Transcript PDF: No time to read the show notes right now? We've made it incredibly easy for you to save time by giving you instant access to the complete digital version of today's show. Click Here to Download Your FREE Copy ?

Free Options Trading Courses:

  • Options Basics [20 Videos]: Whether you're a completely new trader or an experienced trader, you'll still need to master the basics. The goal of this section is to help lay the groundwork for your education with some simple, yet important lessons surrounding options.
  • Finding & Placing Trades [26 Videos]: Successful options trading is 100% dependent on your ability to find and enter trades that give you an "edge" in the market. This module helps teach you how to scan properly for and select the best strategies to execute smarter option trades each day.
  • Pricing & Volatility [12 Videos]: This module includes lessons on mastering implied volatility and premium pricing for specific strategies. We'll also look at IV relativeness and percentiles which help you determine the best strategy to use for each and every possible market setup.
  • Neutral Options Strategies [7 Videos]: The beauty of options is that you can trade the market within a neutral range either up or down. You'll learn to love sideways and range bound markets because of the opportunity to build non-directional strategies that profit if the stock goes up, down or nowhere at all.
  • Bullish Options Strategies [12 Videos]: Naturally everyone wants to make money when the market is heading higher. In this module, we'll show you how to create specific strategies that profit from up trending markets including low IV strategies like calendars, diagonals, covered calls and direction debit spreads.
  • Options Expiration & Assignment [11 Videos]: Our goal is to make sure you understand the logistics of how each process works and the parties involved. If you don’t feel confident in the expiration processes or have questions that you just can't seem to get answered, then this section will help you.
  • Portfolio Management [16 Videos]: When I say "portfolio management" some people automatically assume you need a Masters from MIT to understand the concept and strategies - that is NOT the case. And in this module, you'll see why managing your risk trading options is actually quite simple.
  • Trade Adjustments/Hedges [15 Videos]: In this popular module, we'll give you concrete examples of how you can hedge different options strategies to both reduce potential losses and give yourself an opportunity to profit if things turn around. Plus, we'll help you create an alert system to save time and make it more automatic.
  • Professional Trading [14 Videos]: Honestly, this module isn't just for professional traders; it's for anyone who wants to have eventually options replace some (or all) of their monthly income. Because the reality is that mindset is everything if you truly want to earn a living trading options.

PDF Guides & Checklists:

  • The Ultimate Options Strategy Guide [90 Pages]: Our most popular PDF workbook with detailed options strategy pages categorized by market direction. Read the whole guide in less than 15 mins and have it forever to reference.
  • Earnings Trading Guide [33 Pages]: The ultimate guide to earnings trades including the top things to look for when playing these one-day volatility events, expected move calculations, best strategies to use, adjustments, etc.
  • Implied Volatility (IV) Percentile Rank [3 Pages]: A cool, simple visual tool to help you understand how we should be trading based on the current IV rank of any particular stock and the best strategies for each blocked section of IV.
  • Guide to Trade Size & Allocation [8 Pages]: Helping you figure out exactly how to calculate new position size as well as how much you should be allocating to your each position based on your overall portfolio balance.
  • When to Exit/Manage Trades [7 Pages]: Broken down by option strategy we'll give you concrete guidelines on the best exit points and prices for each trade type to maximize your win rate and profits long-term.
  • 7-Step Trade Entry Checklist [10 Pages]: Our top 7 things you should be double-checking before you enter your next trading. This quick checklist will help keep you out of harms way by making sure you make smarter entries.

Real-Money, LIVE Trading:

  • IWM Iron Butterfly (Closing Trade): Exiting this IWM iron butterfly options trade gave us a $1,100+ profit after pinning the stock price one day before expiration at the peak of our spread.
  • CMG Iron Condor (Opening Trade): I just recorded my live trading platform (and real money account) as I walked through the process of entering a new iron condor trade in CMG stock. Inside you'll see me analyze, price and fill the trade in real-time.
  • APC Strangle (Closing Trade): Took about $150 out of this small APC strangle trade even after the stock moved completely against our short call strikes this month. But as always, implied volatility always trumps direction and because IV went down, the value of this spread dropped more-so than the impact of the directional move higher.
  • IYR Call Credit Spread (Adjusting Trade): This adjustment is good for 2 reasons. First, it reduces the overall risk in the trade if IYR continues to move higher. Second, it still leaves room for the stock to fall back down into our new profit window.
  • XHB Straddle (Closing Trade): We were able to bank a $120 profit early in the March expiration cycle for our XHB straddle with the stock trading right in the middle of our expected range.
  • AAPL Call Calendar (Opening Trade): Look behind the scenes as I use our new watchlist software to filter quickly and find this AAPL call calendar spread trade during overall low implied volatility in the market.
  • COF Strangle (Adjusting Trade): Here I recorded my live trading screen (and real money account) showing you the entire thought process we used to make an adjustment to my current short strangle in COF to reduce risk.
  • GDX Strangle (Opening Trade): With gold's high IV we are getting into a new strangle with a 70% chance of success and a decent credit for selling option premium.
  • IBB Iron Condor (Closing Trade): Today we're exiting an iron condor we traded in IBB for a $142 profit. Inside you'll see me analyze the exit price and fill the trade in real-time.

Thank You for Listening!

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About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.