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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!
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To: Jon Tara who wrote (10713)5/11/1999 3:12:00 AM
From: Dan Duchardt  Read Replies (2) of 14162
 
Jon,

I believe there is in fact a statutory prohibition against using margin in an IRA, and it makes sense. What it boils down to is that you cannot have a margin account for an IRA because you are prohibited from adding unlimited amounts of cash to the account, and that could leave you unable to cover a margin call. It's OK for your IRA to make unlimited amounts of money, or to lose it all, but the annual contribution limit makes it impossible for you to replenish the account if you lose.

We all know that shorting a stock exposes you to a potentially unbounded loss, so in a margin account we are required to maintain a buffer of equity (that can increase without limit) against a run up in the stock price. We also know that writing a put is very different from selling stock short, with a well defined limit (the strike price) on the amount it will cost you to fulfill your obligation if the option is ever exercised. So if you start out with enough money in the account to meet this obligation, it is impossible to generate a "margin call" and therefore it does not violate the apparent intent of the IRA margin restriction.

OOPs. I had missed Greg's earlier reply with the name of a broker. I'll have to check it out.

Dan
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