Option Trading In IRA Accounts

Owners of individually directed IRA accounts may engage in restricted option trading activities. Some of the most speculative activities are prohibited and even some conservative practices are prohibited. However, an adequate assortment of practices are allowed. The popular activities that can be practiced in an IRA account include writing covered calls and selling protected puts.

Writing covered calls

When an investor writes a call against stock that is owned, it is termed writing a covered call.

Selling protected puts

An investor who wishes to sell a put option effectively protects himself by keeping the necessary funds to pay for exercising the put within his account until the put expires. Thus such a sold put can reasonably be termed a protected put. In effect the written put is protected by the money pledged by the writer. The worst thing that can happen to a person who writes a put is to lose the entire amount of the put's strike price. That is the amount of money pledged for a protected put. This term is in contrast to a protective put which involves buying a put option on shares that are simultaneously owned. Thus a protective put protects a shareholder from share price declines since the put earns an offset matched to the loss experienced by the share's price decline. Shareholders who own stock and do not wish to sell it although they are fearful that its price may decline imminently are well served by a protective put.