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I'm taking the strategy of writing calls and puts on the same strike price to take advantage of the time premium. (Always nice when you can tilt a zero-sum game in your favor!) Here's my question. I wrote UNG Jan 2012 cash-secured puts. Then I invested the cash in 90-day TIPS, and I immediately got a cash call. I called them to ask what was up, and they stated that only 90% of the cash that's securing the put can be reinvested. It seems odd to me that they have this requirement given that the notes are backed with the full faith and credit of the government. Is this normal? Legal?
As long as your broker spells out what they will allow you to do and what they won't it is certainly 'legal'. They will make money from you on the transaction costs, and probably from "holding" your dough too -- it does not matter what the underlying security is the broker can limit how much is tradeable.
There are some brokerage firms with amazingly low transaction costs, however I suspect that in addition to the these guys going for "volume" they will also factor in the value they can get from the 'float' on far time horizon trading...
I use a discount broker, their trading costs are not the greatest but there is no maintainance fee for the IRA, and treasury trades are free even on the secondary market.
I understand the risk/reward profile for the play I'm using. As I stated in the OP, I'm actually doing a straddle with short puts and calls.
The issue I'm having is what I'm allowed to do with the cash that is securing the put. None of their online literature brought up the fact that you could only invest 90% of that cash in short-term investments like treasuries, but then again, none of their literature brought up the fact that I could invest any of my cash in treasuries.
I found out what the problem is. You need a margin account to invest the cash that's securing puts, because you're effectively borrowing the security with your cash as collateral. Since IRA's can't be margin accounts, I have to cover the call or see my assets sold or even a closed account. Bummer! I was hoping that I could get an inflation hedge out of it too by investing in TIPs, but I suppose it was too good to be true.
I found out what the problem is. You need a margin account to invest the cash that's securing puts, because you're effectively borrowing the security with your cash as collateral. Since IRA's can't be margin accounts, I have to cover the call or see my assets sold or even a closed account. Bummer! I was hoping that I could get an inflation hedge out of it too by investing in TIPs, but I suppose it was too good to be true.
Believe me I feel for you. A long time ago when I first started working at a place that had IRAs I was excited by the potential to have some say so over where my retirement money was going. The firm that my employer selected was very restrictive. I subsequently have managed to split up my retirement accounts into some that are pretty much on auto-pilot and others that allow more control. Even then it can be frustrating to find out what you are not 'allowed' to do. In most instances the underlying reasons make sense, and I do not think that the investment firms make rules just to make things more difficult, but they obviously cannot allow you to do things that have the potential to leave them holding a very empty bag...
I do think it is possible to come up with strategies to bracket some positions in IRAs to limit downside loss and shave a bit off the appreciation side, but so far the best ways to do that seem to involve getting into funds that have VERY HIGH minimums (>$50K) and that would involve putting too many of my 'eggs' into one basket. Maybe if more people were educated about the potential of using long term options there would be better options for 'little guys' and I suspect that would make these sort of things less risky...
Believe me I feel for you. A long time ago when I first started working at a place that had IRAs I was excited by the potential to have some say so over where my retirement money was going. The firm that my employer selected was very restrictive. I subsequently have managed to split up my retirement accounts into some that are pretty much on auto-pilot and others that allow more control. Even then it can be frustrating to find out what you are not 'allowed' to do. In most instances the underlying reasons make sense, and I do not think that the investment firms make rules just to make things more difficult, but they obviously cannot allow you to do things that have the potential to leave them holding a very empty bag...
I do think it is possible to come up with strategies to bracket some positions in IRAs to limit downside loss and shave a bit off the appreciation side, but so far the best ways to do that seem to involve getting into funds that have VERY HIGH minimums (>$50K) and that would involve putting too many of my 'eggs' into one basket. Maybe if more people were educated about the potential of using long term options there would be better options for 'little guys' and I suspect that would make these sort of things less risky...
It's kind of duplicitous in a way.. they will let me lose as much money as I want by buying options, charge me big commissions for being the intermediary, but they won't take on even a penny of risk themselves unless it's in a margin account.. and I don't even see where the risk is. They only allow you to use 90% of your cash to invest in treasuries.. in most cases, the government will buy the treasuries back from you at fair market value. That's what I had to do to cover the cash call, and I still made money, even though I only held them for a few days. If you lost 10% of your investment in short term US treasuries, I think that would qualify for the Guinness Book of World Records.
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It seems odd to me that they have this requirement given that the notes are backed with the full faith and credit of the government. Is this normal? Legal?
Funny how that works...
