Using Stock Options in a self-directed Roth

[Guest GeneJ]

Are Stock Options (CALLs and PUTs) buying and selling permitted in a Roth account? If not, why not? Thanks, GeneJ

[mbozek]

You should check the CBOE website for the permissible use of options in an IRA.

[ElGuapo]

You may also find these old threads helpful.

Options Trading in IRA

Inidividual Stocks/Stock Options from ROTH IRA account

[Guest GeneJ]

Thanks for your help. GeneJ

[John G]

Reporting in on the road in Florida....

Options in a Roth. There are two sources of restrictions. First the IRS rules on what are allowed in a Roth or IRA. I have never found a really definitive source for these and if my memory serves, Pub 590 does not cover this. By far, the more important source of restriction are the rules/guidelines set by each custodian. Custodians can refuse to support some investments that the do not upset the IRS. Not all custodians will impose the same restrictions.

One of the reasons some investments may be restricted is because they expose the Roth/IRA to unlimited liability. For example, sell a naked call. Consider someone who has a 10k Roth and sells a naked call in XYZ Corp. Suppose the market moves against his position and he needs 20k to close out the postion. How can he do that in a 10K Roth?

Another reason why custodians limit the types of options you can use in a Roth is because they either are not interested in that narrow market segment or perhaps they assume that most folks with Roths (a relatively new investment vehicle) are not likely to have the skills to use options. Or maybe they want a simple Roth department and don't want to devote labor to fixing problems that may arise.

Another reason you may find your account restricted is because you either never filled out the option part of the application or you did not meet the experience, asset or income tests for your specific custodian.

Options that may be allowed: selling covered calls and simple buying of calls. The first means you are selling an option on a stock you own. If the market moves against your position, you simple have your shares called. The second type puts only the "premium" paid for the option at risk. While you may not have the funds to exercise the option, you could certainly sell the option if the stock price rose.

Note to novice and intermediate skill investors - You should not even be thinking about options in a Roth or IRA. If you do not know what a "straddle" is or know the date each month when options expire... then you should not be even considering any options. Option investing requires more intensive monitoring. The spread between bids and asks is large. The percentage of the trade that is consumed by commissions is high. Options are leveraged transactions and are not needed in a Roth to achieve basic retirement objectives. You are likely to be limited to just a few simple options (if any) in a Roth or IRA.

Disclosure: I do a lot of different kinds of investing and have used various options. They are no magic cure or miracle solution, just one of many tools an advanced investor might consider.