IRA accounts are not permitted to employ strategies using Naked Calls and Short Puts must be cash secured. That means some of our strategies are not possible. One strategy we are permitted to use though is the Covered Call. This can help increase our probability of profit (POP) by lowering our cost basis. While that limits our upside, over time it works in our favor. We say that a lot but we still get challenged by some. Are you ready to see the study that proves cost basis reduction is a superior strategy?
Our study was conducted in the SPY (S&P 500 ETF). The time period covered was from 2005 to the present. Holding long stock, we sold the 45 DTE 30 Delta call at the beginning of each month. We then compared the cost basis to the stock and the original debit of the stock.
A visual graphic of the price of the SPY and the original debit paid for the stock in 2005 was displayed. The visual showed the cost basis reduction by selling the 30 Delta call over many years and how the basis actually became negative, meaning the premium collected over the years surpassed the original debit paid for the stock. Tom and Tony noted, “If you could reduce your risk by 33% and improve your returns by 33%, why wouldn't everybody do it?” Another graphic example in cost basis reduction in a stock that doubled was displayed. The stock was Coca-Cola (KO) and the graphic showed that by selling calls against the stock reduced basis and increased the P/L of the overall trade. Selling a naked call is the same as holding upside risk. This upside risk cancels out against long stock. Tom and Tony concluded with “If you limit your profitability, you have to be paid somewhere else, the way you get paid is you have a better POP and by using these strategies you reduce your Standard Deviation of risk.”
For more information on Cost Basis Reduction see:
Best Practices from March 2nd, 2015: “Cost Basis Reduction”
Strategies For Your IRA from September 28th, 2015: “Cost basis Reduction”
Strategies For Your IRA from April 12th, 2016: “Cost Basis Reduction Comparison”
Watch this segment of Strategies For Your IRA with Tom Sosnoff and Tony Battista for the key takeaways and a better understanding of the superiority of cost basis reduction.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.