Can You Trade Options in an IRA?

Thanks to the increased popularity of option trading and more individuals going the self-directed route with their retirement accounts, the question is inevitable - can you trade options in an IRA?

The short answer - and the good news - is yes. Pretty much all major online brokers in the United States offer options-approved IRA accounts.

But there are still some important factors and issues the individual investor should be aware of.

What Kind of Options Can You Trade in an IRA?

The first important issue is simply understanding what specific option trading strategies are available in an options-approved IRA account.

In general, most basic option strategies, including covered calls, buying long calls and long puts, and sometimes writing cash-secured puts will be available in just about any options-approved IRA account.

Depending on the policies of the individual broker in question, certain "intermediate" level trading strategies such as debit and credit spread strategies are also sometimes available for more experienced option traders.

But don't expect to be able to trade particularly sophisticated option strategies inside your retirement account. Additionally, due to regulatory reasons, no trading that requires the use of margin is allowed.

And just as an aside, I would really recommend that you fully understand how the broker classifies and treats selling cash-secured puts. On a risk-reward graph, writing a cash-secured put, under most conditions, is identical to writing a covered call, and yet some online brokers insist on treating cash-secured puts as though they're somehow riskier or more difficult to understand than a covered call, which, in my opinion, is kind of stupid.

And it can potentially block you from using what can be a very lucrative and - depending on how you set it up - low risk option trade.

Differences Between Option-Approved Margin Accounts and Option-Approved IRAs

Regardless of whether you trade options in a retirement account or a regular margin-approved individual taxable account, there are two basic differences between those accounts.

The first, as we've already seen, is that margin is not allowed in an IRA.

That means, for example, if you're approved for writing or selling puts inside an IRA, they must be cash-secured (meaning your account contains the full cash amount to pay for 100% of the shares in the event that you're assigned).

And the second difference is that many online brokers - as I mentioned above - limit the type and complexity of option strategies available to their IRA account holders.

Some of the limitations are to comply with federal regulation, but others are based on the broker's own policies.

It's important to research adequately ahead of time so that you know exactly what trades are potentially available to you before choosing a broker - it can be frustrating, not to mention a waste of time, to go to all the trouble of getting your account all set up and funded only to realize after the fact that you're not allowed to trade and invest the way you were planning to.

The Importance of Trading Levels

Regardless of whether you trade options in a retirement account or a non-retirement account, just because a broker allows certain trades within that account doesn't necessarily mean that you'll have access to those types of trades yourself.

In order to protect themselves from complaints and lawsuits from inexperienced option traders decimating their accounts because they didn't quite understand the risk of their own trades, brokerages categorize different option strategies into various "Trading Levels."

And to make it more confusing, these trading levels are not uniformly defined. There's a sort of general similarity across the industry, but at the end of the day, each brokerage classifies and defines their own option trading levels.

Depending on the broker there will typically be three to five separate trading categories, each level requiring progressively more trading experience and sometimes more capital, net worth, and/or personal income to qualify for approval.

Best Option Brokers for IRA Accounts

There are numerous factors to consider when shopping around for an online broker to set up an options-approved IRA.

Understanding a broker's option trading levels and qualifying requirements shouldn't be the only item you consider, but if option trading is a core component of your IRA investing strategy, it should definitely be one of your top considerations.

I would actually recommend you spend some time on the phone talking with their account reps. Sometimes the pertinent website information is not easy to find, sometimes it's not helpful, and in some cases, it's not even correct.

Speaking with a representative will not only give you confirmation and clarification a lot more quickly, it will also give you a chance to check out your potential broker's customer service.

And customer service experiences and competency can vary widely from one online broker to the next.

And now the next important question - Should you trade options in an IRA?

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