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: Joe Waynick who wrote (2108)	6/18/2001 11:13:48 AM
From: LKO	Read Replies (1) of 2241

I can see from your post that trading options in an IRA pose some unique risks that don't exist in taxable accounts. Understanding the limitations of this strategy is vitally important for it to be effective. Actually, some of them do exist in taxable accounts too, just more unlikely because loaning money is allowed up to SEC margin regulations. For the example I provided, you can imagine a variant where the capital required to buy the stock for 2 nights exceeds SEC margin limits. That would be atleast trigger some minor violation. The second part is probably unique to tax-deferred account situation.( If there is substantial price decrease between close on Friday and open on Monday around expiry, they can probably chase you down to cover the loss without any "yearly limit" considerations). But, these issues represent risks for anyone going through "automatic exercise" on ITM call even in regular account in the sense that in doing that your loss is no longer limited to the amount used to purchase calls which one might think. May I ask what broker you were using when you got your warning about your tax deferred account? My broker for that account was Fidelity. Yes they do allow options trading (except ofcourse to those who are retired with 8 years of savings and have the name "Mike Buckley" which may violate their evaluation criteria <GGG>...just kidding...I really don't know their ways that well). In general, I have found the brokers (including Fidelity) quite confused in their classification of "levels" and risks. Maybe there are reasons to it, but they escape me. They classify covered calls and covered puts (ones according to the definition that requires shorted stock) in the same bracket. The classify naked calls (theoretically unlimited downside) and naked puts (determined limit downside) in the same bracket. And any average joe (or mike?) with margin account can short stock with potentially unlimited risks. Also, if I remember correctly, the accounts "software" is not really able to do the "cash secured" part very well (you can open multiple short puts with the same "cash" securing it and other such holes. I have also had to debate atleast some of the folks how selling cash secured puts was no more risky than covered calls which I was already approved for etc though eventually I prevailed in getting approvals so some folks their probably do get it. Since options trading requires lot of study, they are in some sense trying to protect the "average joe" from themselves, but then again those classifications for options trading are ridiculous. I wonder how they were arrived at. Ahh...lets put all trades with the word "covered" in one risk level and all the trades with the word "naked" in that other level. They were perhaps designed by some management consultant weenie or government beaurocrat (another average joe?) who barely knew short from long and put from call. One would expect all the smart brains at these brokerages to come up with more realistic classification of risk levels and trades and have better software to watch enable things like "cash secured" transactions. This whole area can use a lot of improvements.

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