Fermion
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If you are trading options in your IRA (totally allowed by IRS) and you have the ability to make option spreads in addition to covered calls and cash secured puts, I have a question for you.
If you have a call spread and are assigned the short leg early, is it a trading violation to be short the shares until it can be cleared up with the margin department?
Here, this will explain the situation:
I had 5 August $67.50 Gilead calls and had sold against them 5 August $70 Gilead calls (yes, then Gilead went to $100 but I didn't know that would happen and I still make 150% profit). About 3 days before expiration of both calls, the $70 calls I was short were assigned. It showed up in my Etrade account as -500 shares even though I had $50,000 cash (enough to easily buy 500 shares). My cash balance actually went to $85,000. Etrade sent me an email saying I needed to call the margin department because I can't be short a stock in an IRA. It was easy to clear up as I just directed them to exercise early my $67.50 calls for $33,500 which gave me 500 shares to cancel out the -500 shares from the $70 call assignment.
My question is: Is this a very bad and dangerous thing? I don't want to violate the IRS rules on IRAs because it can lead to a distribution and taxes/penalties on the entire balance. I will quit writing spreads even though I love those so much and they are part of the reason I am up 60% YTD and have made 30% compounded annually for the past 13 years. I could get by on covered calls now because I have enough cash to purchase the underlying stock (previously if I wanted to write just one Apple call pre split, I would have needed nearly $50,000 to buy 100 shares to cover the one call option. A call spread with a deep in the money call to cover the option written might cost only $5,000.
If you have a call spread and are assigned the short leg early, is it a trading violation to be short the shares until it can be cleared up with the margin department?
Here, this will explain the situation:
I had 5 August $67.50 Gilead calls and had sold against them 5 August $70 Gilead calls (yes, then Gilead went to $100 but I didn't know that would happen and I still make 150% profit). About 3 days before expiration of both calls, the $70 calls I was short were assigned. It showed up in my Etrade account as -500 shares even though I had $50,000 cash (enough to easily buy 500 shares). My cash balance actually went to $85,000. Etrade sent me an email saying I needed to call the margin department because I can't be short a stock in an IRA. It was easy to clear up as I just directed them to exercise early my $67.50 calls for $33,500 which gave me 500 shares to cancel out the -500 shares from the $70 call assignment.
My question is: Is this a very bad and dangerous thing? I don't want to violate the IRS rules on IRAs because it can lead to a distribution and taxes/penalties on the entire balance. I will quit writing spreads even though I love those so much and they are part of the reason I am up 60% YTD and have made 30% compounded annually for the past 13 years. I could get by on covered calls now because I have enough cash to purchase the underlying stock (previously if I wanted to write just one Apple call pre split, I would have needed nearly $50,000 to buy 100 shares to cover the one call option. A call spread with a deep in the money call to cover the option written might cost only $5,000.