A brokerage IRA account can be authorized for options trading. The IRA account rules put a limit on the types of options strategies that can be employed. You also want to use those IRA strategies that take advantage of the tax-deferred growth of an IRA account and do not put your IRA value at risk.
Why Options in IRA
The use of options is one way to put some extra growth or generate a higher level of income in your IRA account. Almost all IRA strategies produce short-term profits, which are taxed at the higher short-term capital gains rate if you earned them in a taxable account. There are conservative as well as speculative options strategies. The more conservative option strategies could be a good match for your IRA account, which is money set aside to grow toward your retirement years.
Covered Call Trading
The covered call options strategy involves buying shares of stock and selling call options against those shares. The goal of the strategy is to keep the money from selling calls as profits and possibly have the stock shares increase in value. Selling calls against stock puts a limit on how much you can make on the stock. In the right market conditions, a covered call strategy can produce annual returns of 15 to 20 percent. Covered call writing -- as it is also called -- is considered to be the most conservative options trading strategy, and any brokerage IRA can get approval for covered call writing.
Buying Puts and Calls
Buying call options profits from a rising stock price and buying puts profits from a falling stock price. The cost of buying a put or call is low compared to buying the stock shares, allowing you to earn more profits from the same stock price increase or decrease. The loss potential from buying puts or calls is the amount you spent for the option contracts, putting some of your IRA value at risk. The ability to buy puts is one way an IRA account can be used to profit from a declining stock market.
Advanced Options Strategies
Some of the online discount brokerage firms that cater to options traders allow the use of more advanced options strategies in IRA accounts. The IRA rules allow any strategy that does not require a margin account to protect against excessive losses. An investor who wants to trade spreads, straddles and butterflies in his IRA must find a broker that allows this level of trading in an IRA. The investor will also have to show the broker that he is experienced with this level of options trading before his IRA account will receive options trading approval.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.