Options Trading In A 401(k) Or Other Accounts With Restrictions

by Russ Allen, Online Trading Academy Instructor

Many people have some or all of their investing and trading funds in a tax-advantaged account, like an Individual Retirement Account or 401(k) in the United States; or in Canada, a Registered Retirement Savings Plan of a Tax-Free Savings Account.

How an investor should decide on allocation of funds between these accounts and fully taxable accounts is beyond our scope here. The point of this article is to discuss opportunities for option trading in such accounts, assuming an investor has some money in one of them and is interested in option trading to begin with.

The reason the issue exists is because all accounts of this type have restrictions on the type of investments that are allowed within them. For some, but not all, option strategies may be allowed in the tax-advantaged account that you have.

A typical set of restrictions for a tax-advantaged account might be as follows

Allowed:

Covered Calls

Protective Puts

Long Calls

Long Puts

Cash-secured short puts (Some U.S. accounts)

Debit spreads (Some U.S. accounts)

Credit spreads (Some U.S. accounts)

Not Allowed:

Short stock

Naked short puts

Naked short calls

Cash-secured short puts (Canada)

Debit spreads (Canada)

Credit spreads (Canada)

There are ways to structure trades in these accounts however, that allow us to, in effect, make some of the kinds of trades that are not specifically provided for. The investor can then make his or her choice from a wider selection of strategies.

The key to doing this is awareness of the equivalence between different option positions. If we are not allowed to make a short put trade, for example, then we can construct an equivalent to that short put using elements that are allowed. If we are not allowed to do a long call and a short call simultaneously (debit or credit spread), then we can create equivalents for those too.

Here is an example.

On September 3, 2015, the daily chart of GLD, the exchange-traded fund that tracks the price of gold, looked like this:

GLD was at a demand zone around $107. With interest rate rises probable in the near future and other factors, there was a pretty good bullish case for gold. Option premiums were not high. This was an opportunity for a limited-risk bullish trade called a Bull Call Spread. This would consist of a long call at the $107 strike as the moneymaker; and a short call at the $112 strike to reduce cost and volatility exposure.