SELLING OPTIONS IN IRAS
IRAs and other tax-preferenced programs can be an excellent place from which to magnify the effect of safe option-selling techniques. Sellling options in your IRA brings in immediate income and when done over many years greatly enhances the compounding effect on the portfolio. Let’s examine several potential plans for utilizing these techniques in tax-preferenced plans. Most poeple do not want to take great risks with the retirement savings in their IRAs. Unrpoven non-profitable start-up issues do not attract thier attention. Consequently, for many, a mix of investment-grade, dividend-paying stocks forms an important component of their retirement investment portfolio. We are talking about solid, profitable companies with a global reach that are dominant in their business. Integrated Oil and Gas companies, mjaor Retail outfits, Utilities, Drug companies are often important components of these portfolios. Issues such as these tend to be rich dividend payers and also have listed options. For those trying to build a portfolio of these kind of stocks, the cash-secured put strategy is tailor-made for you. Prepare a list of stocks you would love to own, determine whether any are in or near your buying range, and write cash-secured puts with the intention to buy the stock at a pre-defined strike price. If you are put the stock you are happy and the premium you received lowers your cost basis. If you are not put the stock, you’re still happy because you get to keep the premium (they just keep compounding) and you are free to write additional cash-secured puts. How do you determine whether the stock of a great comapny is a good buy? It’s different for different folks, but as a general rule, many people wait for these stocks to come off their highs before getting interested. As these issues decrease in price, it gives the investor a chance to buy them at relatively low prices, enhancing their long-term value. Also, the put premiums can be higher when prices decrease, increasing the immediate income you add to your account.
What if you already have a nice portfolio of solid dividend-paying issues, presumably acquired at reasonable prices? You are in a good position. You are already receiving dividend income, generally on a quarterly basis. This compounds over time and you can expect to have a respectable return. Now, consider writing covered calls against these stocks. If you are a very conservative investor who wants to hold these issues for a long time, write calls far out of the money two or more months out (maybe even write LEAPS), to capture incremental income to add to your dividend stream. If you want to incorporate more of a trading strategy, then consider writing front-month calls one strike above your purchase price, with the intention of being called our rather soon at a profit. In summary, Traditional IRAs, Roth IRAs, Education IRAs and similar long-term tax-preferenced plans can be a superb place to utilize safe techniques for selling options. Try it, you may like it.
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