By Gianluca Longinotti
Reviewed by Leav Graves
Table of Contents
Can you trade options in an IRA? Yes, but it’s not as simple as jumping in. IRA options trading has limits—forget risky moves like naked options or short selling. Instead, think covered calls and vertical spreads. Wondering how options in IRA and Roth IRA accounts actually work? Stick around to find out.
Key takeaways
- Options trading in an IRA is possible but restricted. Unlike margin accounts, IRAs prohibit borrowing, short selling, and naked options due to regulatory and risk limitations.
- Strategies like covered calls and vertical spreads are allowed. These strategies help manage risk and generate income while staying compliant with IRA rules.
Can You Trade Options in an IRA? The Challenges You Should Know
You can trade options in an IRA, but there are a few important challenges to consider. Unlike margin accounts, IRAs are heavily restricted. For example, you can’t borrow money, short sell, or trade naked options in an IRA. These rules exist because IRAs are meant to protect your retirement savings, and risky practices can result in significant losses. Regulatory guidelines are there to limit exposure to this kind of risk. That doesn’t mean options in IRA accounts are off the table entirely (remember our answer: you can trade options in an IRA, with some limits). Certain “doable” strategies are still allowed and can be useful for both income generation and risk management. Approved strategies include, among others, covered calls and vertical spreads (which you can find on our screener for options). While these strategies can be effective, they are subject to IRA-specific guidelines. For example, some IRAs offer “limited margin” accounts. This isn’t true margin trading like in regular accounts—it merely allows certain offsetting transactions, like spreads, without violating cash settlement rules. Borrowing, however, remains prohibited. When comparing IRAs to margin accounts, the differences are clear. Margin accounts allow for borrowing, short selling, and complex strategies like naked options. IRAs, on the other hand, focus on preserving assets with tighter controls. These limits may feel restrictive, but they help prevent activities that could jeopardize your long-term goals.
What You Can’t Do: The Forbidden Trade
First of all, we need to clarify that while federal and state rules govern in which way you can trade options in an IRA (and in which way you cannot do so), brokers often impose their own restrictions. This means you’ll need to check with your broker to confirm which strategies are allowed. Now, here’s what’s definitely off-limits for IRA options trading.
No Naked Short Calls
You can’t trade options in an IRA if you plan to go for naked sales, because they involve unlimited risk. For example, if you sell a call without owning the underlying stock or offsetting it with another position, your losses could skyrocket if the stock price soars. IRAs prioritize protecting retirement savings, so strategies with potentially bottomless losses are a no-go.
No Margin-Based Strategies
IRAs do not permit borrowing money to trade. Unlike margin accounts, where you can use borrowed funds to amplify trades, IRA accounts are designed for controlled, cash-only transactions. For example, you can’t use margin to buy shares you can’t afford or leverage positions for potentially higher gains. In short, just remember you can’t trade options in an IRA in a margin-based strategy. These restrictions might feel limiting, but their goal is to shield your retirement funds from high-risk and potentially catastrophic losses. Instead of searching for loopholes, focus on IRA-approved strategies that balance safety and returns. Remember, every broker interprets these rules slightly differently, so always check with yours before trading options in IRA or Roth IRA accounts. Speaking of which: can you trade options in a Roth IRA? You will often find that Roth IRA options trading has a lot of aspects in common with regular IRAs, but be sure to check with your broker first.
What You Can Do: IRA and Roth IRA Options Trading
We told you what you cannot do with an IRA, but let's now focus on the ways in which you can trade options in an IRA. While these accounts come with restrictions, there are still effective options strategies you can use to generate income and manage risk. Here is a table mentioning some of the most popular and practical strategies for IRA options trading.
Strategy | Potential Reward | Key Risk | Best For |
|---|---|---|---|
Covered Calls | Steady income and reduced breakeven | Limited profit if stock rallies | Long-term stockholders |
Debit Spreads | Profit capped at difference in strikes minus debit | Limited risk equal to net debit | Controlled bullish or bearish bets |
Credit Spreads | Keep net credit upfront | Loss capped at the strike distance minus credit | Investors expecting minimal movement |
You will find that pretty much everything we have included in this article is also valid for the Roth IRA case (you can trade options in a Roth IRA, as the restrictions are similar to that of a regular IRA).
Covered Calls
Covered calls are a straightforward way for long-term investors to produce extra income from their stock holdings. Here’s how it works:
- You own at least 100 shares of a stock.
- You sell a call option for those shares, agreeing to sell them at a specific price (strike price) within a certain time frame.
This is the typical profit and loss (P&L) profile of a covered call:
For example, if you own 100 shares priced at $50 each and sell a call with a strike price of $55, you’ll collect a premium upfront. If the stock stays below $55, you keep the shares and the premium. If it rises above $55, your shares are sold, but you still keep the premium. The risk? If the stock rallies far past the strike price, your upside is capped. Covered calls are perfect for investors who believe the stock will grow slowly or hold steady. However, keep in mind that American-style options may be exercised early, so your shares could be sold before the expiration date.
Vertical Spreads
You can also trade options in an IRA through vertical spreads. These strategies allow traders to manage risk by limiting both their potential profit and loss. There are two main types:
- Debit Spreads – Buying one option and selling another with the same expiration but a different strike price, costing a net debit. For example, if you expect moderate stock movement upward, you can use a bullish call debit spread.
- Credit Spreads – Selling an option and buying another further out of the money, creating a net credit. A bearish investor could use a bear call spread to profit if the stock price stays below the short call.
Take the example of a short call vertical spread (also known as "bear call spread" on our options screener). The P&L of a bear call spread normally looks like this:
You sell a call with a strike price of $60 and buy another with a strike price of $65. If the stock remains below $60, you collect the full credit. If it rises above $65, your loss is capped at the difference between the two strikes minus the credit you received. If you're using Roth IRAs, the tax-free nature of the account makes your profits even more appealing. In general, you can trade options in a Roth IRA, but always match your strategy to your risk tolerance and consult with your broker to confirm the rules for your IRA.
A Smart Alternative with Long Term Options
There's another way in which you can trade options in an IRA: by using Long-Term Equity Anticipation Securities (LEAPS). These deep-in-the-money, long-term options can act as an alternative to outright stock ownership, especially for those working within the financial constraints of an IRA (and you can trade options in a Roth IRA as well, so that’s something to consider).
Why Use LEAPS in IRA and Roth IRA Options Trading?
- Lower Cost: Instead of committing a large sum to buy 100 shares of stock, you can purchase a LEAPS call option for a fraction of the cost. For example, instead of spending $20,000 on 100 shares of a $200 stock, you might pay just $4,000 for a LEAPS option with a $160 strike price.
- Limited Risk: Your maximum loss is restricted to the premium you paid, unlike outright stock ownership where the share price can drop significantly.
The Risks
- Expiration: Unlike stock, which can be held indefinitely, LEAPS have an expiration date. If the stock remains below the strike price at expiration, the option could expire worthless, resulting in a total loss of the premium.
- No Dividends or Voting Rights: LEAPS holders miss out on dividends and other perks of stock ownership, which can add up over time.
To offset some risks and enhance returns, you can combine a LEAPS call with a short call, creating a covered-call-style strategy. This is known as a "poor man’s covered call" (PMCC), but not all brokers allow it in IRAs. Some require fully covered positions using stocks rather than LEAPS. The strategy can lower your breakeven point and generate extra income while staying within the boundaries of IRA options trading rules. Whether you’re working with a standard IRA or considering Roth IRA options trading, LEAPS can be a creative way to achieve growth without the hefty upfront costs of stocks.