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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: upanddown who wrote (84123)	5/5/2007 10:42:33 PM
From: ChanceIs	Read Replies (1) \| Respond to of 206326

>>>I believe the only options trading you can do in an IRA is to buy puts/calls<<< Schwab will let you do "cash covered puts," but you have to push hard to get it. I makes so much sense to ban cash covered puts. Lets say you had $11 dollars in an IRA. If XYZ Corpwere trading at $11, and tanked, you would loose everything. Alternatively, you could sell an XYZ Corp $10 put for $1, have XYZ tank to zero, and be left with $2. So by all means, lets have the retirement savers take on more risk by banning put sales. Had your Victory Gin yet today???

To: upanddown who wrote (84123)	5/6/2007 10:10:57 AM
From: Wyätt Gwyön	Respond to of 206326

At Fido, you cannot sell naked options in an IRA. yes, you can sell cash covered puts in an IRA at Fido. this is not any more dangerous than doing a buy-write (buying the stock and selling a covered call). these are functionally equivalent strategies. If you do anything short, options or stock, your losses are theoretically unlimited. no, if you short a put, your loss is limited to the difference between the strike price and zero, net of the option premium. just like when you buy a stock for 100, your loss is limited to 100. in a margin acct, people can get in trouble with naked puts because they sell more puts than they have cash available to cover their potential liability (this is also why returns on equity can be high--because people take a big risk). e.g., if you have 100k in your acct, you might be able to sell puts with a notional strike-to-zero value of 800K. with cash covered puts, the strike-to-zero will not exceed your cash plus premium. here is a simplified example: 1) buy-write: you have 90K cash in an IRA. you do a buy-write, where you buy 1000 shares of a stock costing 100 and simultaneously sell the 97.5 strike call for 10K. the stock costs 100K, but you get 10K for the sold call. you now have zero cash, 1000 shares of stock, and are short a call which caps your upside at 97.5. in this scenario, your maximum upside is 7.5K/90K = 8.33%. your maximum downside is you lose 90K (stock goes to zero). if the stock closes above 97.5 at expiry, you will have 97.5K and no stock (your short call requires you to sell it at 97.5, even if the stock has gone to 200). if it closes below 97.5, you will have 1000 shares of the stock and no cash. 2) cash-covered puts: you start with the same 90K, but instead of buying the stock at 100 you sell the 97.5 put for 7.5K. you now have 97.5K cash, zero stock, and are short the put. your upside is the same 8.33%. if the stock closes above 97.5 at expiry, you will have 97.5K and no stock. if it closes below 97.5, you will have 1000 shares of the stock and no cash (your short put requires you to buy it at 97.5, even if it has fallen to 50). i said the above scenario was simplified. actually you will get a little less cash in 2) for the put than you will get in 1) for the call, net of intrinsic value. but in 2) you have an extra 97.5K in your acct earning interest. the expected interest return on the extra 97.5K in 2) accounts for the difference between the put and call amount. in other words, the real-world puts in this scenario may only net 7K instead of 7.5K, but the other 0.5K might be expected to come from the interest earned during the holding period. this is all calculated in Black-Scholes. also keep in mind that 2) has fewer transactions, so spread costs and commissions are less. the main advantage of 1) as i see it is you can "leg into" it. i.e., you could try to buy the stock at 95 and sell the calls at 105, thereby getting the stock cheaper and also selling the calls for more. but if the trades are put on at the same time, it is a buy-write and the same as selling cash-covered puts. if there is a big difference between the prospects of 1) and 2), it is an arbitrage opportunity and we should expect it to be arbitraged away, assuming there is sufficient liquidity. there may be theoretical arb opportunities in illiquid stocks, but these opportunities may vanish like a desert mirage when you try to capture them due to lack of liquidity. there is unlikely to be any glaring arb opportunity in very liquid names like GOOG. if there was, you would expect some hedge fund with MIT quantum physicists to be capturing it.