Tuesday, June 26, 2007

Sharebuilder's Options policy for IRAs

I applied for options trading in my Sharebuilder IRA account and was approved. However, apparently it is Sharebuilder policy to only allow options "level 1" trading in IRAs. That means you can only "write" (sell) covered calls. In other words, the only thing they let you do is buy, say, 500 shares of GE and then sell 5 call option contracts on those shares. They say that is the least risky options play. BS! Now, granted, if you do not have a lot of discipline, uncovered options can be very dangerous. You can easily lose 100% of your investment on just about every options deal. However, like I said in a previous post, the conservative play is to only invest about 5% of your money in options. The incredible leverage that options provide turn that paltry 5% into a serious investment. The other 95% of your money can be in a safe investment like bonds, getting around 5% interest. That would mean that in the worst case, you lose NOTHING over the course of a year, and in the best case, you get about the same return as if you had been invested 100% in stocks. Just think how useful that would be in times like stock market crashes... just the sort of thing you worry about with your IRA. Because you can't pump a bunch of extra money in if the market goes way down!

Ah well, I'm learning why IRAs need more conservative investment strategies than normal stock trading accounts. I'm just disappointed that I can't play around with the option-bond strategy, which to me sounds like just about the safest possible investment strategy that still gives you some decent return. Ever since I learned about options, I've realized that they are one of the tools of the rich. Little things like Sharebuilder's policy keep this valuable tool out of the hands of small investors. If I had $1 million in net worth I'm sure I could find a broker willing to let me trade any type of option I want in my IRA.


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