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My retirement account (a traditional IRA) will let me write a covered call, where I sell a call option if I have the underlying securities (for instance, 100 shares of IBM). The shares are required to be held in case the call I sold is exercised.

They will not allow me to sell a "covered put" where the cash is held to purchase the 100 shares if the owner of the put option exercises it.

I'm particularly interested in using this as a long term purchasing plan: selling a covered put with an expiry 1-3 months out and that is already "in the money", expecting it to be exercised by the purchaser. When it is exercised, I'll have purchased it for less than if I bought it on the current market.

Is there some form of risk associated with this idea that I'm missing? Or is it a regulatory provision for retirement accounts?

  • Did you ask your broker for access to writing puts? If so, what did they tell you? At one of my brokerages, options trading is classified into different levels, and only customers who request access and acknowledge the higher risk involved are given access to selling puts. – Chris W. Rea Sep 2 '10 at 17:35
  • @Cris W. Rea: I have been approved for options trading. They have a specific statement on the trading page that they currently allow IRA accounts to only place Covered Call option trades. – yhw42 Sep 2 '10 at 18:06
  • Never heard of a 'covered put' perhaps you mean a 'married put'? – Noldorin Sep 4 '10 at 11:58
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    Saying that, reserving the cash to buy 100 shares upon exercise doesn't make sense. You buy the shares at the same time as the option. – Noldorin Sep 4 '10 at 13:26
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    @noldorin, I think you're blurring the two strategies being discussed: In the married put, you're right that you buy the stock and the puts at the same time (which is what technically makes it "married," rather than just "protective"). But in a "cash-secured" put, you sell the put, and post the money first, but don't actually spend the money to buy the stock until later, if and when you are assigned (meaning the other person exercised their right). – Jaydles Sep 4 '10 at 15:33
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You're correct in your implied point:

Selling a cash secured put has less risk (in terms of both volatility and maximum loss) than buying the security outright.

However, many brokerages don't allow cash-secured put writing in IRA accounts. There are three reasons this tends to be the case:

  • The higher suitability standards in an IRA makes the firm concerned that even though the strategy is safer than buying the stock, it's more complex, and the duty to ensure that the client understands the risks (small upside, large downside, etc.) makes it not worth offering.
  • The firm's systems can't differentiate between cash-secured put writing and other types of put writing that are not appropriate for IRAs (naked put writing, covered put writing against short stock, etc.)
  • The firm's permitted options strategies for IRAs have not been changed in many years. This is the most common one. Most firms established covered calls, or covered calls and protective puts as the only strategies they'd allow when they first became IRA custodians, and simply haven't changed them since.
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    You finally got a question you were qualified to answer! – Michael Pryor Sep 2 '10 at 19:28
  • Great answer! What is a protective put? – yhw42 Sep 3 '10 at 3:36
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    @yhw42, a protective put is a strategy in which you buy a put when you own a corresponding number of shares of the underlying stock. The put acts like insurance, "protecting" the stock from a decline below the strike price. – Jaydles Sep 3 '10 at 11:20
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A broker does not have to allow the full trading suite the regulations permit. From brokersXpress:

Do you allow equity and index options trading in brokersXpress IRAs? Yes, we allow trading of equity and index options in IRAs based on the trading level assigned to an investor. Trading in IRAs includes call buying, put buying, cash-secured put writing, spreads, and covered calls.

I understand OptionsXpress.com offers the same level of trading. Disclosure - I have a Schwab account and am limited in what's permitted just as your broker does.

The trade you want is no more risky that a limit (buy) order, only someone is paying you to extend that order for a fixed time.

The real answer is to ask the broker. If you really want that level of trading, you might want to change to one that permits it.

  • If I decide that having the option to use puts (pun intended!) outweighs the hassle of moving accounts, its good to know that some brokerages do allow it. Thanks! – yhw42 Sep 4 '10 at 19:21
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I have a Roth IRA with Scottrade, and they allow me to write cash secured puts, as well as covered calls. I can also purchase calls or puts, if I choose. When I write a cash secured put, it automatically deducts the amount required to purchase the shares at the strike price from my "cash available for transactions".

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A "covered put" of the form of being short, and buying at the strike price if the "put ... is put" (excercise), is off the table simply because you can't do shorts in the retirement account. Even if you feel you "win" the argument that you're hedged by being short, any broker can say, "we simply forbid shorts" and that's that.

A "covered put" of the form of posting the cash, and spending it to buy at the strike price if the "put ... is put" (excercise), might be forbidden by brokerages because, frankly, how do you account for the "dedicated" cash? Is it locked down like margin is, or escrow, or what? I don't know offhand how I would address that in my very own firm. Thus, any broker could say, "we forbid it" and that's that.

The other answers are very interesting in conjunction with this. JoeTaxpayer says, very paraphrased, 'just cuz it's legal doesn't mean we have to offer it.' Jaydles says (again, completely paraphrasing), 'complex stuff for a safe little retirement savings account;' 'difficult to administer' (as I said, how do you account for it); and 'tradition'

So maybe look at Scott, per Thorn's answer, LOL. It appears that you can shop around on this issue.

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