How to Trade Options in a Tax Advantaged IRA

Getting hit with short term capital gains tax on your options trades? Here are some strategies that may be suitable for investing in a tax advantaged IRA.

Premiums you earn by selling options are typically taxed as short-term capital gains, which are levied ordinary income tax rate. Earning options premium in an IRA, therefore, gives you a significant tax advantage. Popular options strategies for earning options premium include selling cash secured puts and covered calls.

Already have a tax advantaged brokerage account that is approved for options? Link it to Olive and start earning premium.

Whether you have a traditional IRA or a Roth IRA, you are likely eligible for a limited margin account that allows you to apply certain option strategies. You won’t be able to sell naked call options, which nobody should ever do because you expose yourself to unlimited risk, but you can cash secure all your trades and defer taxes in a traditional IRA or avoid taxes on any gains in a Roth IRA.  

Often less risk than buying shares. Selling out of the money put options generally incurs less risk than buying stocks outright. In fact, selling cash-secured put options can sometimes be a fixed income alternative for investors.  

For example, say $AMZN is trading at $100 and $70 strike put expiring in one year has a premium of $10. You get paid $1,000 of premium upfront (an option contract represents 100 shares) and you are obligated to buy $AMZN shares at $70 for $7,000 if the option is assigned to you. Selling one contract would require you to have $6,000 in your account to secure the trade. As long as $AMZN trades above $70 per share in a year, you will keep that $1,000 of premium. Earning $1,000 on $6,000 equates to about 17% return over a year while the risk is for $AMZN to fall below $60 for you to start losing.

This is also the beginning of a popular theta gang strategy known as The Wheel Strategy. The basics behind the Wheel strategy: 

  1. Sell OTM puts (cash secured preferably), then
  2. Sell covered calls if you get assigned the shares.

This strategy works best for an asset you have a long term bullish outlook on the asset and do not mind the potential risk of assignment. Since the profit collected is purely from options premium, when the Wheel Strategy is done in a tax advantaged account, you can avoid or defer short term capital gains tax.

Put Credit Spread on $AMZN

With Olive, you can link your tax advantaged account and easily find and execute options strategies likes these. Start reaping the benefits of tax advantaged options by joining today.  

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