IRA accounts are not allowed to short naked calls, and any naked puts must be cash-secured. This limits the amount of capital we can allocate to other positions because of the margin we are putting up. Is there anything we can do to reduce the buying power?
We can reduce the buying power requirement in an IRA by creating wide vertical spreads. This is done by purchasing options against our short options. The delta of the options we purchase will be low, generally less than 5.
For reducing the margin on a two-sided undefined risk trade such as a Strangle, we can define our risk and instead sell an We can use an iron condor, which is a combination of the previous strategies, to replicate a strangle in an Iron Condor in an IRA account.
A table comparing a 1 standard deviation Strangle to a 1 standard deviation Iron Condor in well known stocks was shown. We compared the total credit received, buying power reduction, probability of profit (POP), and the maximum return on capital (ROC).
Watch this segment of “Strategies for Your IRA” with Tom Sosnoff and Tony Battista for the valuable takeaways and the cost benefit analysis of using OTM options to reduce the buying power reduction in an IRA account.
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