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. Please assess your financial circumstances and risk tolerance before trading on margin.
Covered Call Trading
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. 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.
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The IRA account rules put a limit on the types of options strategies that can be employed. 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.
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 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.
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.