Trading LEAPS
The Smart Profits Report: Issue #127
Tuesday, July 20, 2004
Trading LEAPS: How to Get 1,100% Returns from Your IRA
By Karim Rahemtulla
Investment Director, Mt. Vernon Research
Until about a year ago, the only type of option that you could trade in your self-directed retirement account (your IRA, for example) was a covered call - an option sold against a stock you already own. And that made perfect sense. Covered calls are among the most conservative, consistently lucrative option strategies. In my own experience, these plays - which use both leverage and hedging - are profitable about 80% of the time. So covered calls and safe cash have always gone hand in hand.
But what if you could trade any type of option in your IRA account? What if you could, say, double the average returns in your IRA in the next 12 months? Most of the investment world hasn’t yet caught on (and maybe that’s a good thing - see below), but with last year’s changes to the IRS codes, you can now trade virtually any option from your IRA account. And that includes trading LEAPS options such as the Lockheed Martin play that produced a 1,100% return for my readers last year…
However, before you rush out and drop your retirement savings on a non-covered option play, a few words of warning…
Trading LEAPS & Your IRA: Would Any Sane Investor Do It?
The rationale for trading high-risk options in your IRA account is not hard to understand - to a point.
After all, if you can use your IRA account to buy common shares in a two-room AIDS vaccine company… or a fuel-cell company… or even a junior mining stock on the Toronto exchange… then why can’t you put your butt on the line buying naked options, as well?
The risk is about the same, except your options losses will look like a quick kill compared to the long, drawn-out torture (say, a week’s worth) of losing money in a penny stock or a speculative biotech.
So, sure… It is now possible to trade LEAPS and even naked options through your IRA using a reputable broker. But would you really want to?
For me, the answer is no. I’d prefer to let my IRA perform the unglamorous task of providing me with safe, steady returns. For the higher-risk stuff, I’ll use money I can safely afford to lose… not money that will hopefully be standing between me and manual labor once I retire. (Although I would - and do - trade covered calls from my “safe” accounts.)
If You’re Going to Risk It, Have a System
However, each investor has his own risk-tolerance for different parts of his portfolio. So if you do decide to trade options with a small portion of your IRA - for whatever reason - by all means use a system.
By that I mean: a system that imposes discipline and elevates your trading above the level of gambling or “playing the hunches.”
If you do have a system that’s worked in the past, and you use it in your IRA, you might save your retirement account from decimation. Or, you could even boost your IRA returns by an obscene amount this year - through trades with payoffs as high as 1,100%.
Good Trading,
Karim Rahemtulla
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Today’s Smart Profits Crib Sheet
- Check out our Smart Profits Glossary for detailed explanations of options-trading terms such as “naked options” and “LEAPS.”
- Above I mention the importance of trading with a system… To check out two proven systems for low-risk options trading, visit www.mtvernonpublishing.com and view “The LEAPS Option Trader” and “The Income Trader - A Covered Call Strategy.”
Related Articles:
- Stock Option LEAPS: Buying LEAPS Or Stocks… What Should You Do?
- Position Sizing: The Most Powerful Investment Concept in the World
- Smart Profits Trading: Four Critical Truths
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