Strategies for IRA

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Efficient Use of Time

Strategies for IRA

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Traders managing an IRA know that the name of the game is efficiency. Due to the regulations that come along with trading options in an IRA (cash-secured puts, no naked short calls, etc.), IRA traders must use every edge there is to replicate returns of options traders not exhibiting these obstacles in their accounts.

Today’s primary topic of discussion is time and how efficiency can factor into the decision of which expiration to trade in a retirement account. The example used here is the cash-secured put with the comparison coming between 45-day options and LEAP options about a year out.

Tom and Tony start off by comparing credits and potential returns of these short puts with varying times to expiration. While the longer-term option has the larger credit and thus larger potential return on buying power on a cash-secured basis, the LEAP option comes with a few caveats.

When we annualize the short-term option credit, we see a much more similar opportunity. Also, the returns for the same delta puts with different expirations look very similar historically with the main difference being that the 1-year short put must be held almost 8 times longer on average to reach 50% in profits relative to the credit received.

The segment concludes with a brief discussion of how LEAP options can also increase a trader’s error term, theoretically, due to fewer occurrences.

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