Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study! -- Ignore unavailable to you. Want to Upgrade?

To: NateC who wrote (11726)	10/23/1999 5:36:00 PM
From: Herm	Read Replies (1) \| Respond to of 14162

According to the Benjamin and Jerold brokerage literture which you can download at stockoptions.com, they claim the following is allowed in their IRAs. "In an IRA, both calls and puts on stock and index options can be purchased. Because risk is quantified, spreads, such as time spread, debit or credit spreads are also permitted. Selling puts against cash is also allowed but a put sale must be 100% cash collaterlized (secured). This means if 10 puts are sold on Disney @ 30, $30,000 in cash must be ready in the account waiting to buy Disney if it declines and 1,000 shares are assigned. As you can see, selling puts against cash is IRA eligible but very capital intensive." NO MARGIN IN IRAs and the house min. is $15,000! Now, you have it!

To: NateC who wrote (11726)	10/25/1999 12:01:00 AM
From: KFE	Read Replies (1) \| Respond to of 14162

Nate, Good to see your thirst for options knowledge has not abated. Be extremely cautious about this though do these brokerages who allow LEAPS in an IRA....ALSO allow you to CC those Leaps (Calendar Spread)? 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 CC 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