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Options trading in an IRA as per IRS (publications 560, 575 and 590)

by David LeVine
Options trading in IRA as per IRS (publications 560, 575 and 590)

The Department of Labor (DOL) is the principal authority responsible for prudent, allowable investments and overseeing prohibited transactions in qualified plans (and granting exemptions) involving IRAs under IRC section 4975(e), the rules are summarized as follows:

Types of Options trading allowed in IRA accounts:
  • If you own an IRA worth about $25,000 or more, you can invest in options.
  • Credit Spreads and Debit Spreads are allowed.
  • Butterfly spreads are allowed.
  • Covered call writing is allowed

What is not allowed in an IRA?
As IRAs are designed to provide retirement security, speculative trading with undefined risk, trading on margin and trades that require borrowing are not allowed.

  • Any type of derivative trade (options or futures) that has unlimited or undefined risk, such as naked Call or Put writing, is prohibited by the IRS. This are also described as ‘uncovered options’ are not allowed by IRS.
  • Margin trading is not allowed
  • As IRS does not allow borrowing from your IRA plans, so this restricts several types of stock market trading, including selling shares short, buying on margin (credit) and selling options naked (not owning the underlying shares)

Types of IRA Options Trades

  • Covered Calls: A "Covered Call" is an income strategy where you sell Call options against shares of stock you already own. You can sell one options contract for every 100 shares of stock. You collect premium in exchange for the options you sell. Covered Calls involve risk, and the risk profile is similar to selling Naked Puts.
  • Vertical Spreads & Iron Condors: A "Vertical Spread" is an income strategy involving buying and selling of options of the same underlying symbol with the, same expiration date, but at different strike prices. With Vertical spreads you receive a CREDIT when you make the trade, and they have a defined risk.
    Learn how to trade CONDOR spreads.
  • Butterfly Spreads: A "Butterfly Spread" is an income strategy involving buying and selling multiple options of the same underlying symbol with the, same expiration date, but at different strike prices. With Butterfly spreads you enter the trade by paying a DEBIT, which is the maximum loss.
    Learn how to trade BUTTERFLY spreads.

Here are some brokers who offer Options trading in IRA accounts:

Broker Covered Calls & Cash Secured Put Vertical Spreads Butterfly Spreads Minimum balance Commissions

Yes Yes Yes No $6.95 + $0.75 per contract
Interactive Brokers2

Yes Yes Yes No $0.70 per contract

Yes Yes Yes No $4.95 plus $0.65 per contract
Fidelity4 Yes Yes Yes Minimum of $2,000 per spread $4.95 + $0.65 per contract

Yes Yes Yes No $6.95 plus $0.75 per contract

Yes No No No $6.95 + $0.70 per contract
Merrill Lynch7

Yes No No No $6.95 + $0.75 per contract

Yes Yes Yes No $3.00 + $0.15 per contract
Options House (now ETrade)9

Yes Yes Yes No $4.95 + $0.50 per contract
OptionsXpress (now Schwab)10 Yes Yes Yes No First 10 contracts $14.95, additional $1.50 per contract
Trade King (now Ally)11

Yes Yes Yes No $4.95 + $0.65 per contract
TastyWorks12 Yes Yes Yes No $1.00 per contract to open, no closing commission

  1. TDAmeritrade - emails
  2. Interactive Brokers - http://ibkb.interactivebrokers.com/node/188
  3. Schwab - https://www.schwab.com/active-trader/insights/content/potential-benefits-spread-trading-ira-accounts
  4. Fidelity - https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/customer-service/supplemental-options-spreads-agreement-for-IRAs.pdf
  5. eTrade - https://us.etrade.com/e/t/estation/help?id=1304010000#c
  6. Scottrade - https://www.scottrade.com/online-brokerage/trading-fees-commissions.html#tab1
  7. Merrill Lynch - https://www.nerdwallet.com/blog/investing/merrill-edge-review/
  8. EOption - http://eoption.com/fee-structure/commission-schedule
  9. Option House - https://www.optionshouse.com/webinars/options-strategies-in-an-ira/
  10. OptionsXpress - http://www.optionsxpress.com/about_us/pricing_commissions.aspx#options
  11. Trade King - https://www.tradeking.com/trading-options/trading-options-in-an-ira
  12. TastyWorks - https://tastyworks.com/accounts.html

Other Sources:

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