Credit spread in a RRSP or TSFA Account

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BarbeBlanche

Greetings!

In Canadian RRSP or TFSA accounts, you can’t execute a standard credit spread because margin isn't allowed. However, you can simulate one by selling a covered call and buying a further out-of-the-money (OTM) call.

The goal is to generate income from long-term positions while minimizing the opportunity risk of getting assigned and missing out on potential upside if the stock rallies.

This approach allows you to choose the level of potential opportunity loss. For example, right now, the 10-days-out SPY ATM (549) call is priced at 6.43 (delta 0.508), and the 551 call (delta 0.455) is at 5.28, resulting in a net credit of 1.15. The breakeven point is 550.15 on this option play.

  • Max profit: 1.15 if both options expire out of the money (OTM).
  • Potential opportunity cost: If both options expire in the money (ITM), the opportunity cost is limited to 0.87.
Does this strategy make sense over the long term, or is it preferable to avoid assignment by rolling a standard covered call?

Additionally, if this strategy does make sense, what would be the optimal width of the spread to maximize return?

Finally, am I correct in assuming that the probability of the long option being ITM, given that the short option is ITM, can be estimated by dividing the delta of the long option by the delta of the short one? In this case, 0.455/0.508 ≈ 0.896, or roughly 89.6%.

Thanks!
 
"selling a covered call and buying a further out-of-the-money (OTM) call" - not allowed in any registered / cash account, only possible in margin account.
 
Thanks for your answer! Looking at the CRA rules , it seems that the combination of a covered call with the purchase of a long call option is allowed (see 2 sections below). I will confirm with my broker.

Listed securities
1.16 Except for certain derivatives, any security that is listed on a designated stock exchange (as described in ¶1.17) is a qualified investment. This accommodates a wide range of listed securities, including:

  • shares of corporations
  • put and call options
  • warrants
  • debt obligations
  • units of exchange-traded funds
  • units of real estate investment trusts
  • units of royalty trusts
  • units of limited partnerships

1.41 As discussed in ¶1.86, an RRSP, RRIF, RDSP, FHSA or TFSA is generally taxable on its business income. If an RESP is found to carry on a business, the registration of the plan may be revoked. A registered plan that engages in option writing strategies that are speculative in nature may be considered to be carrying on a business. It would therefore be taxable on any premiums or other income earned in connection with such activities (or be revocable in the case of an RESP). Whether a taxpayer carries on a business can only be determined following a review of all of the facts relating to the taxpayer's particular circumstances. The CRA’s view is that the writing of a covered call option, whereby a registered plan sells a call option in respect of an underlying property which it already owns, does not result, in and of itself, in the plan being considered to be carrying on a business. In contrast, the writing of an uncovered call option, or the writing of a put option, whether alone or in combination with other positions, may result in the plan being considered to be carrying on a business.
 
Of course this is allowed in a registered or cash account. You do the covered call and then you buy a call option. As long as you're holding the underlying there's no issue.
 
Interesting idea. I'm a complete rookie with options (going to get my feet wet with simple covered calls in my TFSA soon) and I'd be very curious to hear arguments in favor of buying that extra call which uses up most of the covered call's proceeds. I always assumed that rolling the covered call would be more profitable.
 
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