Delve even deeper into options trading and you will find the path riddled with opportunities. Within that realm of opportunity, you will find trading options within an IRA account to be one of the primary concerns. Using options in an IRA account will put the odds in your favor – as they provide the ability to compound your investments for years to come with powerful hedging abilities, while also being able to help provide consistent income along the way.
There are several factors in assessing the importance, relevance, risks, and benefits of trading options in an IRA account. At the top of the structure, you have the fact that simply having an IRA makes it possible for you to defer taxes on dividends and capital gains, while also providing the ability to re-invest your profits tax-free. Delving deeper, it is then critical to understand that you cannot gain the benefits of trading options with an IRA without understanding options, understanding the different types of IRA’s that you can trade options in, understanding the available strategies, understanding and assessing your risk tolerance, and adhering to a well thought-out plan of attack based on your goals and objectives.
A clear to path to understanding the benefits of trading options in an IRA is to compare them with trading stocks in an IRA. Now, options have never been more readily available or more liquid than they are today. The simple fact is that you can grow your IRA at a faster rate with options, as opposed to stocks. Not only that, but options offer you a variety of products to trade, highly liquid options to choose from, and an array of defined-risk strategies to implement in your decision making. And the beautiful thing is that these strategies cater to the risk profiles of traders at every level – which means that a younger trader could implement more aggressive strategies in his IRA trading account than someone who is nearing retirement.
All of these strategies lead to the many conservative spreads that you can implement with options. For example, if you’re selling a vertical call spread on the SPY and the S&P does not move up 7% in the following 30 days, then you can make a 5-8% return on your money by selling that vertical call spread. This is a prime example of the benefits of trading options and riding with the current of bigger market happenings.
Another positive factor weighing in on trading options in your IRA, is the fact that you can buy expensive stocks at a fraction of the price, while still retaining that relatively low-risk trade that we are always on the hunt for. Options also add the ability to hedge your portfolio or “add insurance” to mitigate loss in your trades, which is very important in an IRA portfolio. For example, if you have a long-term portfolio that you are bullish on, and you see a short-term signal where you don’t want to get out (you like staying in to collect dividends :)), then you can use options to hedge your account (buy puts or use a collar trade) with long-term pullbacks, in turn allowing for your options to defer and prevent a total loss.
You are not allowed to trade level 4 or 5 options within your IRA account due to the increased risk that comes with naked options. However selling covered calls (Level 1) and using spreads and long calls/put will still implement conservative and effective techniques with small amounts of capital. For example, you can own a stock for a fraction of the cost by buying a long-term option that has a 2-year or more time duration. Since you cannot buy a stock on margin in an IRA, you have much more leverage while using much less capital on a long-term options contract (LEAPS). So next time you’re bullish on a stock think to yourself: “why don’t I use options to make a higher return using less capital?”
Once you thoroughly understand how to use options effectively, then properly assess your risk, and finally implement the correct strategy – trading options inside an IRA account is a wise and lucrative way to safeguard and diversify your portfolio. Understanding options and the surrounding strategies is important, and when trading options in your IRA account, it is paramount that you understand the risks associated with them, and you have a well thought out plan of attack to ensure consistent trading success!
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