I agree with this but I am not sure I understand the point you are making. My point is that the maximum amount on which a penalty is computed under 4973 appears to be limited by the value of the account as of the end of the year. Under my understanding of the facts here, the value would be zero if Developer17 contributes no more than is necessary to cover the loss in his account.
Margin Call on an IB IRA account (Need Suggestions)
- Thread starter developer17
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I agree with this but I am not sure I understand the point you are making. My point is that the maximum amount on which a penalty is computed under 4973 appears to be limited by the value of the account as of the end of the year. Under my understanding of the facts here, the value would be zero if Developer17 contributes no more than is necessary to cover the loss in his account.
developer17's IRA went from $1500 to -$8500. Then it went from -8500 to 0. (When IB drained his other account). So this last move could be considered a contribution. OTOH in one of the above 21 pages of discussion there is some talk about how an IRA cannot be negative. I mean in a non-IRA account if you go negative you can write it off (when you pay it off) can't you?
To bad position wasn't closed at end of trading on Monday.
Date --- Open --- High --- Low --- Close
Jun17 - 279.00 - 280.30 - 275.90 - 280.30
Jun20 - 276.09 - 287.67 - 271.73 - 286.70
Date --- Open --- High --- Low --- Close
Jun17 - 279.00 - 280.30 - 275.90 - 280.30
Jun20 - 276.09 - 287.67 - 271.73 - 286.70
Clearly, options in an IRA are a delicate and intricate thing, Thats one reason why brokers didnt allow it for so long, too many ways for things to go wrong.
That said, you are responsible for knowing the nasties that are out there. It's a mans game.
I didnt like it when I thought I'd be auto exercised a few years a go on an option that was itm by more than 25 cents, but at that time only dealers got auto ex on 25 cents and retail was something like 50 cents. (it was a stinking $5 stock). So i ate the few hundred loss and cursed the options exchange for the rule that clearly favored the dealers.
That said, you are responsible for knowing the nasties that are out there. It's a mans game.
I didnt like it when I thought I'd be auto exercised a few years a go on an option that was itm by more than 25 cents, but at that time only dealers got auto ex on 25 cents and retail was something like 50 cents. (it was a stinking $5 stock). So i ate the few hundred loss and cursed the options exchange for the rule that clearly favored the dealers.
mss, The brokerage firm lets the IRS know how much contribution was made in the previous year usually around the middle of the current year. Unless developer17 clarifies with IRS with his/her situation quickly (as I indicated in http://www.elitetrader.com/vb/showthread.php?s=&postid=858104#post858104), IRS may think more than maximum allowable contribution was made for the year 2005 and penalize developer17. developer17 should establish with IRS that that "excess" contribution was not initiated or approved by him. If developer does not do anything and on the other hand, developer17's broker reports to IRS differently, it will be an uphill battle for developer17. The whole thing is a bad situation for developer17. It needs to be clarified with the IRS so that it does not get any worse.
I suggest developer17 simply defer his taxes until August 15 and wait and see what IB files with the IRS in mid-year. (They do send him a copy?). Its possible that the IRS could say, you didn't click the don't exercise button, you implicitly caused these losses and subsequent contributions. That said, I'm doubtful that the IRS bureaucrats care about pro-actively ruling on this or that he would get consistent advice from them. Its a messy situation, but clearly he didn't commit any pre-meditated criminal tax evasion. He could look at the possible penalties, file his best effort at a return, and wait for the fallout, if in fact there is any. Wait for the IRS to come after you, if they do, and get an personalized decision from the case officer who cares. But the odds are low that it would come to that. Assuming you look carefully at what IB files and factor that into your tax return. That's my two cents. Find a real tax lady though, not H&R Block.
You would only think that if you had never read the "Characteristics and Risks of Standardized Options" that you acknowledge you have read before being allowed to trade options at any firm, and never traded options. Knowing when, how, and why options can/will be exercised/assigned is the stuff you are supposed to learn before anything else.
Quote from stock777:
I didnt like it when I thought I'd be auto exercised a few years a go on an option that was itm by more than 25 cents, but at that time only dealers got auto ex on 25 cents and retail was something like 50 cents. (it was a stinking $5 stock). So i ate the few hundred loss and cursed the options exchange for the rule that clearly favored the dealers.
I think it was 3/4 (0.75), and the difference had to do with the high average retail commissions (on exercise/assignments) at the time, i.e. if it cost $50/contract to exercise, you wouldn't want to exercise at only $0.25 ($25/contract) ITM. I don't understand why you say this favored anyone, as long as you knew the rules, and were able to give instructions as needed.
I didnt like it when I thought I'd be auto exercised a few years a go on an option that was itm by more than 25 cents, but at that time only dealers got auto ex on 25 cents and retail was something like 50 cents. (it was a stinking $5 stock). So i ate the few hundred loss and cursed the options exchange for the rule that clearly favored the dealers.
I think it was 3/4 (0.75), and the difference had to do with the high average retail commissions (on exercise/assignments) at the time, i.e. if it cost $50/contract to exercise, you wouldn't want to exercise at only $0.25 ($25/contract) ITM. I don't understand why you say this favored anyone, as long as you knew the rules, and were able to give instructions as needed.
I have never read it but this thread is an eye opener. I only looked as far as the right to buy but not obligated to buy.
It looks like if GOOG had closed only $0.06 lower ($280.24 instead of $280.30) then this would not have happened. I believe that options ITM by $0.25 or more are exercised.
What they consider as the closing price may also be hard to determine. "Pin risk", when you are close to the money near expiration, is something that requires some work, and the ability to hedge if necessary - something that is difficult/impossible to do in a retirement account and still maintain a decent ROI (i.e. without a bunch of cash sitting idle).