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. 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.
Choosing a Brokerage
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.
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. Brokerages have these protocols in place because of the risks inherent in options, relative to the more familiar and widely-used practice of trading stocks.
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.
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 $25.50 (100 shares would cost roughly $2,550), but you would only need $90 to buy a September BBY $26 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.
- The Options Industry Council: Options Strategies: Long Call
- IRS.gov: Retirement Plans FAQs regarding IRAs
- U.S. Securities and Exchange Commission. "Investor Bulletin: An Introduction to Options." Accessed Sept. 25, 2020.
- Cboe. "Options Quick Facts - Terminology." Accessed Sept. 24, 2020.
- Cboe. "Options Quick Facts - LEAPS." Accessed Sept. 25, 2020.
- The Options Clearing Corporation. "Expiration Calendar." Accessed Sept. 24, 2020.
- U.S. Securities and Exchange Commission. "Settling Securities Transactions, T+2." Accessed Sept. 24, 2020.
As a writer since 2002, Rocco Pendola has published numerous academic and popular articles in addition to working as a freelance grant writer and researcher. His work has appeared on SFGate and Planetizen and in the journals "Environment & Behavior" and "Health and Place." Pendola has a Bachelor of Arts in urban studies from San Francisco State University.