Courtesy of Rev. Todd, Rev Todd’s IRA Plot, PSW member
I love the way Phil does buy-writes that leads to buying stocks at a 20 percent discount and a nice long-term, no stress profit. Add in some debit spreads on TZA, SDS or whatever else to protect and I sleep very well at night. I am quick to load up on buy-writes whenever Phil gives the word. But a silent killer lurks in the shadows when I walk the dark alleys of my IRA account – margin requirements. (Cue the scary organ music.)
To illustrate the dilemma, look at CSCO on Phil’s buy list. He recommends buying Cisco and selling the $20 strike on calls and puts. If I go into that trade today, CSCO is at $22.23, and I would sell the Jan. 2012 call at $4.90 and the put for $2.55 for a great entry and a break even point that is 22% down. If Cisco holds above $20, the profit is $529 on 100 shares. Since the margin requirement (buying power in TOS) is only $1316, that makes for a 40% profit in 16 months, about 2.5% a month. Very nice!
So I move to my IRA account to do the same trade, set things up very quickly and get ready to pull the trigger and look at the margin requirement, which is now $3471! I would still make $529 profit, but gain is only 15% or just under 1% a month. What happened? In a margin account I only have to put up half of the $2223 to buy the 100 shares of CSCO, minus $$490 for selling the call, plus about $590 in margin to sell the put, which comes to only $1316. In my IRA I have to put down $1745 to sell a cash secured put ($20 put strike minus the $2.55 sale = $17.45 per share). Plus I have to put up all the purchase cost of the stock minus the cash I get for selling the call which is a whopping $3471.
There is absolutely nothing wrong with making the trade in my IRA account. I want security in my retirement, and 1% a month profit with downside protection is certainly better than the bobble-headed shark working for DaBoyz while taking 2% in yearly fees out of my account is going to make for me. But I would like to do better than that, which is why I’m trying to sell covered calls and make about 3 percent a month. I do this by selling in-the-calls for the following month, hoping for an average gain of 3% a month with 8 to 12 percent downside protection.
But here is the dilemma I face with this strategy. Stocks jump around quite a bit and my downside protection isn’t nearly a great or as long-term with Phil’s trades, plus I cannot do his downside hedges in my IRA either, so I don’t have the security. How do I protect myself from a big correction writing monthly covered calls? Tune into the IRA plot next week and found out for yourself!
