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Trading Options in your IRA

What you need to know before trading options in your IRA account.

Interested in trading options in your IRA?

You've come to the right broker. TradeKing combines a powerful online trading platform with award-winning customer service and easy-to-understand options investing education for beginning and advanced traders alike. Investing for retirement couldn't be easier.

If you're ready to start investing money for your retirement, your first move may be to open an Individual Retirement Account (IRA). (You may also wish to invest in a 401(k) or other employer-sponsored retirement investing account. If you are no longer employed at the firm that sponsors your 401(k), you may want to consider converting your 401(k) to a Roth IRA or traditional IRA, which usually offer broader and more flexible investment choices)

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If you're interested in self-directed investing online, you may decide to allocate a percentage of your retirement funds to stock market investing, options strategies, international investing, IPO investing or other forms of more active trading. You may allocate the rest of your money into long-term investing vehicles with the goal of attaining more stability. These include investing in bonds, diversified assets, and other fixed income investment strategies.

But before you invest in anything, you'll need to open a retirement account.

Opening your IRA

The two most popular kinds of IRAs are Traditional IRAs and Roth IRAs. When comparing traditional vs. Roth IRA, the tax situation is an important element to consider. In a Traditional IRA, your annual contributions may be able to be deducted from your taxes in the year in which you invest. The downside is that you'll have to pay taxes on withdrawals in retirement. In a Roth IRA, you invest post-tax dollars now and receive no current tax deduction - but you can then withdraw funds tax-free during your retirement years. If you meet the qualifications for this account type, Roth IRAs let your invested funds compound tax-free, which can save you a bundle over the long run.

TradeKing offers no-fee IRAs with a broad array of personal finance-investing choices. As an independent investor, you ultimately call the shots on your investment choices. That said, we'd be happy to introduce you to investing tools, online resources and investing news sources to help you find investments that match your needs.

If you're interested in options, make sure you request options approval as part of your application. The granted options approval level depends on your level of trading experience, investable assets, and other suitability factors. Our online process makes it easy to request options approval, or just ask to speak to a TradeKing account-opening concierge.

I have an IRA. Now how do I start investing and trading?

Excellent question. Today investors can choose from lots of different investments vehicles, but it can be bewildering to know how to begin. In addition to asset allocation choices like those described above, investors need to develop their own approach and style.

For example, some prefer value investing, or opt for investments that match their personal values, like socially responsible investing or biblical investing. (Both of these approaches go by other names: the former by green investing, environmentally responsible investing, ethical investing or simply green investing; the latter by Christian investing, manifest investing, or sound mind investing.) All of these approaches can offer attractive choices that also match your personal beliefs and market outlook.

What kinds of options strategies can I trade in my IRA?

When used appropriately, options can be a highly flexible investment. Some traders choose directional positions, also known as speculating. In these trades (such as buying a long call or long put) it is possible to have a profit and loss profile which allows for substantial or unlimited profit potential with defined risk. But keep in mind, an investor can lose the entire amount invested. Another choice is to reduce downside risk on an existing stock position. This can be done when buying a protective put. A third common facet of options trading has a goal of generating premium. This is commonly pursued with a covered call play. The investor may collect premium by selling a covered call against an existing stock position. Although this play limits the upside profit potential of the combined position, it may be worthwhile when minimal movement is expected. Of course, there is still substantial risk in this scenario - if the stock declines in value. In other words, learning about options can help equip you for trading options in any market condition.

Smart investing means getting educated first, so let's start with a few "don'ts" of options trading in your IRA. IRAs cannot be enabled for margin trading, which prevents you from using certain options strategies. For example, if you sell short puts, they must be completely cash-secured. Otherwise this strategy is not permitted in an IRA. Short put positions have a limited profit potential with a substantial amount of risk. You also cannot sell short calls ("naked" calls) in an IRA. A short call also offers a limited profit potential but can result in unlimited losses. Other advanced strategies that are off-limits because they involve margin include call front spreads, short combos, or VIX calendar spreads. If you use these three strategies in a non-retirement account, you should be informed of a few important facts. These spreads involve multiple option legs with additional risks and multiple commissions. They also may result in a complex tax situation which would be best handled by your personal tax advisor. And finally, these are limited profit potential strategies which may result in unlimited losses.

You can learn about these and other options strategies, including minimizing risks and tips for improving your chances of success, at TradeKing's online trading education center. Our thriving Trader Network includes the popular Options Guy blog, offering easy-to-follow options education for beginning to advanced skill levels.

Open a TradeKing account today

A nationally licensed stock and options brokerage, TradeKing's mission is simple: to help self-directed investors become smarter and more empowered traders. At TradeKing we offer the same fair and simple price to all our clients - just $4.95 per trade, plus 65 cents per option contract. You'll trade at that price, no matter how often you trade, or how big or small your account may be. Why not make investing fair and simple?

SmartMoney awarded TradeKing its maximum 5 stars for outstanding customer service in from 2008 through 2011. The SmartMoney online brokerage survey evaluates brokers in categories including commissions, trading tools, investment products, customer service, research, interest rates, banking amenities and mutual funds.


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