We think it’s silly, but there are serious restrictions when a trader wants to selling premium in an IRA account. It’s totally prohibited to sell a naked Call in an IRA account and a short Put must be cash-secured which means the margin for the short Put has to cover the unlikely possibility that the underlying goes to zero. That’s a huge hit to Buying Power.
A solution to this problem is to purchase a further out-of-the-money (OTM) Put or Call, one with a 5 Delta. That makes it possible to short the Call and cuts the Buying Power Reduction (BPR) for the short Puts by as much as tenfold. The tradeoff is that P/L results will not be as good.
Three different tables were displayed. The first showed how adding a 5 Delta Put made only a slight difference in the average credit received. Doing so though lessened the BPR enabling more trades and a larger number of occurrences. The other two tables displayed the results of adding a long 5 Delta Put to a short at-the-money Put managed at 50% of max profit (if possible) or a short 30 Delta Put also managed at 50% (if possible). The tables included the success rate, median P/L and largest loss. The table showed that adding the cheap OTM wings only reduced the success rate and median P/L minimally.
For more information on the concepts discussed here see:
Market Measures from May 2, 2016: "The Cost of Buying Protection"
Best Practices from March 22, 2016: "Choosing Wings Based on Probabilities"
Strategies For Your IRA from August 10, 2016: "IRA Approved Strangles"
Strategies For Your IRA from August 24, 2016: "Strangles, Iron Condors and Inbetweens"
Watch this segment of Strategies For Your IRA with Tom Sosnoff and Tony Battista for theimportant takeaways and the detailed results of our study of adding long 5 Delta Puts to our naked Puts to reduce the hit to Buying Power in an IRA account.
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