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Strategies & Market Trends : The Covered Calls for Dummies Thread

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To: Dan Duchardt who wrote (3293)	1/20/2002 11:08:29 PM
From: KFE	Read Replies (1) of 5205

Dan, It is conceivable that a broker could protect IRA accounts from early assignment, but I have no idea if they are constrained from doing that. They are constrained from so doing. There is a larger question about spreads in an IRA that we have discussed before that must be answered before considering doing spreads in an IRA even if some firm allows you to do it. Most firms don't allow margin accounts in an IRA. It is not the margin account that is an IRS violation but rather the use of margin that is the problem. First, when you write a shorter term option against a LEAP you have a calendar spread. You are not CCing anything. The LEAP cannot be delivered to settle your assignment on the short option. This is where you can have a potentially big problem in an IRA. How are assignments going to be handled? I am assuming that a brokerage firm that would allow you to do spreads in an IRA is figuring that the long side could always be exercised to cover. If you exercise the long LEAP you would be giving up any time value remaining and that would probably be substantial on a LEAP. There is also a more troubling potential problem in that a loan may have been created if the long exercise is not given on the same day as the short assignment which is more than likely the case. It is industry practice to allow this but I am not sure that this will fly with the IRS for an IRA account. If you feel the need to do spreads in an IRA then you should make sure that you have an answer to this question from the IRS before doing them. If you create a loan in an IRA the consequences are severe- you IRA account loses its tax exempt status. If you get in a jam with the IRS you will not be able to say that your brokerage firm let you do it as an excuse. I have seen and heard many horror stories where a brokerage firm has given advice or let a customer do something that caused major tax problems. Regards and good trading, Ken

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