Options for Newbies -(Help Me Obi-Wan-Kenobe) Message Board

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Strategies & Market Trends : Options for Newbies -(Help Me Obi-Wan-Kenobe)

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To: Mike Buckley who wrote (2105)	6/16/2001 9:30:00 AM
From: LKO	Read Replies (2) of 2241

More trivia on Options trading in retirement (tax deferred) accounts. Here is a link to a CBOE white paper on that exact topic. cboe.com It mostly talks strategies, but towards the end has a subsection called "Prohibited Transaction Rules" which gets into how loaning money into account is illegal. I once got a warning to disqualify my account and (by ignorance/mistake) ran afoul of these rules by letting an in the money call go through an "automatic exercise" (instead of closing the position by buying back the calls on expiry day at close). In an automatic exercise, the broker buys the stock at the call strike price on Saturday of option expiry and sells it Monday morning at open. Here is roughly what the situation in my account was at the time: - Approx $30K in cash and mutual funds. - Had 10 contracts on a stock with about $8000 in the money because I had a call for stock XYZ at $80 and at close on Friday it was at $88. As best as I understood, here are the reasons why automatic exercise was dangerous in that case. - Someone had to loan me money for 2 nights (Saturday and Sunday) to be able to buy 1000 shares of XYZ at $80 since the account had no capacity (margin or cash). - If some "really bad news event" happens between close at Friday and open on Monday, XYZ (in theory, howsover unlikely) can go from $88 to $35 where I would be in the loss (even though I was ITM at close on Friday), and there would be no "margin" or "cash" in the account to absorb this loss. (I wonder what will happen in that case. They can't just ask you to add more money in the IRA at will. There are yearly limits). So, one has to be aware and "behave differently" when doing options in a tax-deferred (IRA or Keogh) account. This newbie had to learn it the hard way. Hopefully you guys can avoid ever getting into this situation. In the example above, just make sure you close on expiry day.

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