LKO,
- 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).
This is good info, but I think it should be emphasized that even w/o the "really bad news" you already have a problem. In fact, if there was really good news that drove the price up for a higher profit, you still have the problem. The purchase of the shares for which you did not have the cash would be allowed in an ordinary cash account, but would generate a demand for you to deliver cash to cover the purchase price. Under Reg T, the proceeds from the sale can never be used to cover the purchase of a security. Since, as you say, one cannot deliver unlimited cash to an IRA account, you are in violation of IRA rules.
Fortunately, it seems some allowance is made for a mistake here and there before "they" bring the hammer down, but the hammer is a big one.. loss of IRA status of your account and immediate tax liability for any tax deferred contributions and gains, plus the 10% early withdrawal penalty if you are under age for qualified distributions.
I have a broker who allows long calls in my IRA, but only if there is enough cash to cover the exercise price. That takes away all the leverage, but at least I still have the downside protection of buying calls instead of stock. That paid off during last year's Nasdaq crash.
Dan |
