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I hear covered call sellers are making a killing in this market
- Thread starter stock777
- Start date
Yes. If you are married to the stock then covered calls are a way to enhance returns if the stock is not called away or reduce your loss if the stock tanks. Whether holding the stock is a good idea is a whole other discussion. A better strategy, though usually not the best strategy, is to buy a LEAP rather than the stock and wrtite calls agains the LEAP. Risks are lowered and returns enhanced. Time decay and vol changes add 2 more dimensions to price. So which strategy is best at any given time you have to consider at least 3 dimensions of price, vol and time.
Quote from jnbadger:
Please ask your broker the difference between a covered call and a naked put.
I'd love to hear what he has to say.
I was in my broker's office today. He tried to tell me that covered calls were the only options trades allowed in an IRA because of IRS rules. When I disagreed with him he went to talk to their "options specialist", who verified my point.
That old IRS rules is yet another broker con job. The IRS has no rules about the IRA. Any decent broker will allow you to do any strategy in your IRA except for naked calls and short stock. The reason those 2 are not possible is that you may be at your contribution limit for the year and unable to contribute to meet a margin call.
The ignorance of the user does not change the risk of the strategy. Naked puts and covered calls have the same risk/reward profile and barring any small price discrepancy, the puts have the advantage.Theoretically...on paper...yes. But think about the risk profile for the average investor or trader, and you'll appreciate more the reasons for naked selling restrictions in a brokerage account.
With a covered call, the investor must own the underlying to write the call. So they are aware from step one of their account exposure, because the underlying is there clearly in the account.
But naked puts can be very dangerous in the hands of the inexperienced, who often fail to calculate the downside and their total market exposure when the underyling tanks.
The reason for the selling restrictions is the danger of leverage due to lower margin requirements for options.
Quote from Eliot Hosewater:
I was in my broker's office today. He tried to tell me that covered calls were the only options trades allowed in an IRA because of IRS rules. When I disagreed with him he went to talk to their "options specialist", who verified my point.
Check out Think or Swim.
They'll let you do anything with predefined risk, including naked puts.
Your broker is full of shit when he tells you it's an IRS guideline. It's firm specific.
Quote from jnbadger:
1) Check out Think or Swim.
2) They'll let you do anything with predefined risk, including naked puts.
3) Your broker is full of shit when he tells you it's an IRS guideline. It's firm specific.
1) I have a non-IRA account at TOS. After I get a little better at trading options I'll open an IRA there.
2) I think we should start using the term "cash covered puts". I don't think TOS or anyone will let you do real naked puts in an IRA.
3) That's what I told him, using more polite words.
Quote from jnbadger:
Check out Think or Swim.
They'll let you do anything with predefined risk, including naked puts.
Your broker is full of shit when he tells you it's an IRS guideline. It's firm specific.
To clarify, TOS will let you sell naked put secured by cash available in your IRA acct (so does IB). But then there will not be much of leverage. However you can sell put spread in IRA to reduce the "margin".