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Strategies for IRA

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Visualizing Cost Basis Reduction

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.

IRA accounts are not permitted to employ strategies using Naked Calls and Short Puts must be cash secured. That means some of our strategies are not possible. One strategy we are permitted to use though is the Covered Call. This can help increase our probability of profit (POP) by lowering our cost basis. While that limits our upside, over time it works in our favor. We say that a lot but we still get challenged by some. Are you ready to see the study that proves cost basis reduction is a superior strategy?

Our study was conducted in the SPY (S&P 500 ETF). The time period covered was from 2005 to the present. Holding long stock, we sold the 45 DTE 30 Delta call at the beginning of each month. We then compared the cost basis to the stock and the original debit of the stock.

A visual graphic of the price of the SPY and the original debit paid for the stock in 2005 was displayed. The visual showed the cost basis reduction by selling the 30 Delta call over many years and how the basis actually became negative, meaning the premium collected over the years surpassed the original debit paid for the stock. Tom and Tony noted, “If you could reduce your risk by 33% and improve your returns by 33%, why wouldn't everybody do it?” Another graphic example in cost basis reduction in a stock that doubled was displayed. The stock was Coca-Cola (KO) and the graphic showed that by selling calls against the stock reduced basis and increased the P/L of the overall trade. Selling a naked call is the same as holding upside risk. This upside risk cancels out against long stock. Tom and Tony concluded with “If you limit your profitability, you have to be paid somewhere else, the way you get paid is you have a better POP and by using these strategies you reduce your Standard Deviation of risk.”

For more information on Cost Basis Reduction see:

Watch this segment of Strategies For Your IRA with Tom Sosnoff and Tony Battista for the key takeaways and a better understanding of the superiority of cost basis reduction.

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