Has anyone been selling call options inside the IRA and purchasing the

[Guest dkb1955]

Has anyone been selling call options inside the IRA and purchasing the offset outside the IRA? Investor is willing to take risk that neither option will be exercised but that this would be a great way to get funds into IRA.

[John G]

Get used to the fact that IRAs are restricted in many ways compared to other kinds of investing. For example, you can not margin your account to buy more stock then your available cash.

No custodian will allow you to expose an IRA to unlimited risk such as naked puts/calls. Only some IRA custodians will allow you to sell a covered call associated with an equity position you hold within the IRA.

You can not make an "arrangement" that allows you to transfer funds into an IRA related to positions taken in other accounts. The reasons for these limitations stem from both IRS regulations, IRA rules and custodian reluctance to support non-traditional investments. You can not play a position within and IRA against a position outside an IRA. The only way to "get funds into an IRA" is to make a contribution or complete a transfer funds from another retirement vehicle. Forget the schemes.

If someone tells you such schemes are legal or can work, find yourself another company with which to conduct legal business.

[Guest krrimkus]

I regularly invest in covered call option WRITING inside my IRA with Vanguard Brokerage services. It has been quite successful. I like to buy the stock and immediately write a covered call, usually well "in-the-money". Going one month out my option is usually assigned and I get my original investment back plus the premium. Returns I shoot for are 5-10% (PER MONTH!!!) Pick stocks not likely to plunge below your adjusted basis in one month.

[John G]

Covered calls (own the stock, sell the right to buy to someone else for cash) is allowed by many but not all IRA custodians. Legit if your custodian allows.

Most mortals will find it impossible to make 5% a month by selling covered calls. I've sold them at times. First, you run the risk that the underlying stock heads south. Second, the premium for a one month option is rarely anywhere near 5% unless you are fooling with very volatile tech stocks. Finally, if you own an outstanding stock (like Dell or Cisco in the 1990s) you will never participate in the upside move. Let's not oversell the technique. Covered calls, when cleverly placed, may boost the annual return a few percentage points.

Initial question was an illegal scheme to artificially boost IRA assets. Wrong. Illegal. No custodian would allow it. Think jail time for tax fraud.

[Guest krrimkus]

You are correct. I am fooling with the volatile high tech stocks. That is why I select options only one month or less to expiration as well as deep "in the money" and pick a stock on an uptrend. Its not for the faint of heart but has been sucessfull so far. Have to watch them daily which I can do now that I'm retired. Thanks for your feedback.

[John G]

Your covered call strategy has a high transaction cost, both in terms of commissions and time commitment. Yes, the out of pocket cost may be significantly reduced if you are using an internet brokerage. But, if you examine your options carefully, you will see that the "spread" is huge as a percent of total value of the transaction, another negative.

Recently, lots of folks that were selling covered calls on stocks such as Intel, Microsoft, and Lucent (to mention a few 40% haircuts) got caught holding the bag, eh, I mean stock. You need lots of 5% gains to overcome one major debacle. Being deep in the money (option strike price is below current stock price) does not help you if the stock is heading south.

[Guest krrimkus]

All true! So far I guess I've been lucky and use a deep discount broker.

[EGB]

What about the use of covered calls in a qualified retirement plan (eg, money purchase, 401(k))? If allowed, does the plan or trust agreement specifically need to provide for them?

[Guest krrimkus]

I would think only your 401K administrator could address that. I haven't heard of it and my 401K is with Fidelity.