WHAT COULD POSSIBLY GO WRONG ??
idiots
idiots
Tastyworks Is Now Making Naked Calls Available In IRAs
- Thread starter ajacobson
- Start date
No, it's not. It's just that most brokers don't want to deal with the potential headaches so they don't allow it. Just like short selling, margin, etc, are also allowed but almost no brokers offer those services to IRA accounts.
Robert Morse
Sponsor
I have tried but can't find that rule with either the SEC or FINRA. Same with shorting stocks. Anyone have a link? and if they got approval for short options but not short stock, what happens if you get assigned a short call?
Some brokers allow limited margin accounts for IRAs (trading on unsettled funds) so cash secured short puts are allowed. As I understand it, the IRS has a no loan policy for IRA accounts (no margin). To comply, you cannot use the IRA assets as collateral. So how do you sell naked calls (hypothetical unlimited margin) without violating the no loan policy?
Exactly
Your IRA can borrow money, just not from you and you can't use the IRA as collateral for a personal loan you get (or if you do, there are really bad consequences). Some types of debt used by your IRA may generate UBTI, which could cause the profits, if any, to be taxable to the IRA. So that's a headache that many people and brokers would want to avoid, so they tend to disallow legal possibilities that could generate that situation, but it's not that the IRA is disallowed from either shorting or borrowing money. Shorting seems fine actually, see the IRS letter below.
https://www.asppa-net.org/Portals/2/PDFs/150825 ASPPA Schultz Unrelated Business Taxable Income.pdf
https://www.irs.gov/pub/irs-wd/201434024.pdf
Nope. UBTI is not relevant as this is securities trading. Here is the problem simply. You've maxed out your contribution for the year and your short call get's exercised and a debit exists that exceeds your available cash. You liquidate to pay the loan - may be OK, but definitely not worth to going to tax court. Your call get's exercised and your net debit after selling out everything and used all your free cash. What does your broker do ? Lend you money on your IRA - taxable event and really ugly consequences and they are required to report. It' text book - you sold a call on a $10 stock - let's say they require 2X in cash to cover(btw this where the profitability to the firm will come in - on the interest rate spread on the cash). Stock get a takeover offer at $35 or gaps open to $35. You now have a unsecured debit in the IRA and you have a limit on contributions.