What You Can and Cannot Trade

Custodians differ, and the binding constraint is usually the broker’s approval tiers rather than the Code. Broadly:

Permitted

Long calls and long puts. Covered calls against stock you hold. Cash-secured puts, where settled cash equal to the full assignment obligation sits in the account. Defined-risk vertical spreads, iron condors, butterflies, and calendars — provided the maximum loss is fully collateralized at all times. Protective puts and collars. Long LEAPS.

Prohibited

Naked short calls, in every IRA, without exception — the loss is theoretically unbounded and cannot be collateralized. Uncovered short puts beyond available cash. Short stock, because it requires borrowing shares. Any position whose maximum loss exceeds the account’s settled cash and collateral.

The “limited margin” misnomer

Most custodians will approve a limited margin agreement on a retirement account. It does not lend you money and it does not increase your buying power. It does two narrow things: it lets you trade with unsettled proceeds without committing a free-riding violation under Regulation T, and it permits spread strategies whose legs settle at different times. Note that US equity settlement moved to T+1 in May 2024 under SEC Rule 15c6-1, so the unsettled-funds problem limited margin solves is now a one-day problem rather than the three-day problem the older brokerage literature describes.

The long-put assignment trap. If you hold a long put on stock you do not own and let it expire in the money, the OCC’s exercise-by-exception process will exercise it automatically — and exercising a put without owning shares creates a short stock position the IRA cannot legally hold. Equity options are not cash-settled; only broad-based index options are. What actually happens is that the custodian closes the position before expiration, usually on the Thursday or Friday of expiration week, at whatever price the market offers. You do not control the exit, and in a fast market that can be materially worse than the intrinsic value you were counting on. Close your own in-the-money long puts, or hold the shares.

Assignment with insufficient cash. A cash-secured put that gets assigned requires the full strike value in settled cash. If a corporate action, a pending trade, or a partial withdrawal has left the account short, the broker cannot extend credit to cover it — so it liquidates other positions at its own discretion to fund the assignment. In a Traditional IRA that forced sale is not even a taxable event, which sounds like a mercy until you realize it also means nobody was watching for the tax consequence that would normally have flagged the problem.