Spreads fit nicely in Tax Deferred Accounts
We are starting a new series called Hedging Tip of the Week. In it, we will pick some short educational topics that we explain in 2 paragraphs or less. This week’s tip is about using spreads in tax deferred accounts.
Call and put spreads are very good fits for tax deferred accounts like IRAs. We use spreads to create hedged positions – but like to set our expirations at 6 months or less from today. As a result, we create a lot of taxable events in the buying and selling of these options. These events are always short-term in nature so they would get taxed at regular taxable income rate. The way to avoid the taxable consequences: place these trades in your IRA account.
In fact, consider using call or put spreads to control more shares of a broad index ETF in your IRA than you could control if you just bought the ETF outright. Remember that spreads are more capital efficient and you can control more shares with significantly less money. Instead of keeping this cash in your IRA – use it to control more contracts in your spread. Then, adjust your investments in your OTHER investment accounts. Whatever you do – don’t permit your implied leverage across ALL of your portfolios to exceed 1.0x. And I also recommend keeping your implied leverage within the IRA to less than 2.0x. You don't want your IRA to get blown out of the water either!
Hedging Tip of the Week #1
Posted on March 7th, 2012
Posted in ETF Hedges, Hedging Techniques Tagged with no tags
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