Can Call Options Be Bought in a Roth IRA?

Buying (or going long on) call options gives investors the opportunity to profit from a stock's appreciation, but for a fraction of the capital, it would take to buy ​100​ shares of the stock outright. Options are considered financial securities, much like stocks, according to the brokerage firm Fidelity.

As you save for retirement or some other purpose, you can use call options in your Roth IRA. Before you buy calls, however, you'll need to make sure you're with a brokerage that allows its customers to trade options and will provide you approval for the privilege.

What Should You Know Before Opening the IRA?

Both Roth and Traditional IRAs are usually used for long-term investment assets, so buying options through an IRA is not common. Not all brokerages provide customers with the ability to trade options. Before you open an account, ask the financial institution not only if it permits options trading, but if it allows the practice in IRA accounts. The answer should be the same for both Roth and traditional IRAs.

There are restrictions on trading through IRA accounts that disallow some of the more risky elements associated with trading options such as naked selling, short selling and trading on margin. Consider also how contribution limits might restrict trading through your Roth IRA. Trading any options through an IRA should only be considered by experienced traders.

When Can You Trade Options in Your IRA?

When you open a Roth IRA account with a brokerage that provides options trading, you have to request options trading privileges. Brokerages do not allow all customers to engage in options trading. While systems vary from brokerage to brokerage, you generally must meet account value, net worth and investment experience benchmarks to receive approval to trade options.

Depending on your risk appetite, there are multiple options strategies that can be traded through an IRA. Charles Schwab indicates that covered calls and collars are both popular strategies that include call options. Brokerages have strict protocols in place because of the risks inherent in options, relative to the more familiar and widely-used practice of trading stocks.

How Do Options Approvals Work?

Furthermore, brokerages use a system of laddered options approval levels. Generally, the initial levels allow you to execute the most basic options trades, while more advanced levels permit advanced options trading strategies. To go long on calls, most brokerages only require you to qualify for options approval level number one.

For the most part, subsequent approval levels do not apply to Roth IRA accounts, as these advanced levels require a margin account. You cannot trade on margin (borrow money from your brokerage using your account equity as collateral to increase buying power) in IRAs.

What Are the Advantages of Call Options?

Generally speaking, buying call options allows investors to profit from a stock's upward movement without the type of capital outlay it takes buy stock. When you buy a call, you have the right, but not the obligation to purchase 100 shares of the option's underlying stock at the contract's strike price on or before its expiration day. You pay a premium for a call, which is far less than a stock's market price.

For instance, as of this writing shares of Best Buy (BBY) traded for ​$117.50​ (100 shares would cost roughly ​$11,750​), but you would only need ​$95​ to buy a September BBY ​$25​ call.

As with any other type of trade in a Roth IRA, the IRS allows you to defer taxes on profits from options trades (selling the premium back to the market at higher price prior to expiration) or exercised options (buying ​100​ shares at the contract's strike). If you follow IRS rules, the agency allows you to remove Roth earnings tax-free, generally once you hit Uncle Sam's mandated retirement age of ​59 1/2​.