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Merrill Edge trying to take back a trade. Need advice


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Last week I bought some calls in my Roth IRA. The stock moved up and today I was able to sell covered calls for the same date at a strike a few bucks higher. It worked out well, I actually netted some cash from the trade.

 

When I tried to sell the covered calls initially, the online portal didn't allow me to. I called in and was told that the system does not recognize the long calls thus it is interpreting my short call order as naked. But they understood what I was trying to do and put the trade in for me anyway by overriding the system.

 

Now I noticed that suddenly, all of the cash I have in the account is no longer available to trade for. It is there but I cannot use it to make purchases. I called in to figure out what is going on. They were confused too and investigated.

 

A few hours later I got a call back and was told that "bullish call spreads are not allowed in retirement accounts and whomever put in the trade should not have done so". They are telling me that a bull spread requires margin, even though it is covered by a long position.

 

He gave me two options:

1. I can unwind the trade

2. I can move the short call to my taxable account since it is not settled yet, essentially making it a naked call

 

The second choice makes absolutely zero sense because they are trying to reduce an apparent "risk" by going from covered to naked. And I didn't accept the first choice either because by this point I was so angry. I told him to go higher up to someone who can approve this trade as a courtesy, because if I am forced to unwind, I am moving my money out.

 

He said he will get back to me. In the meantime, my significant cash balance in the Roth is still locked up, so I can't use it even if I wanted to until this is resolved.

 

I've thought about it and realized that if they don't honor this trade I can get them to replicate in my taxable account. But that's bullshit because of the obvious significant tax implications.

 

Any advice on what to do? It's such a significant amount of money involved, both in what is locked up or the tax implications if I move it, that I feel I should get a lawyer involved.

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If I understand the trade you are describing correctly, it should not need margin.  Option-specialist brokers allow this type of trading in IRA accounts.  You would only need to claim experience or whatever gets you the trading permissions / authority.

 

Do you mind sharing which brokerage this occurred at?  They should just honor the trade, even if their own IRA offering does not allow spread trading at this time.

 

** Nevermind I see Merrill Edge in thread title now

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If I understand the trade you are describing correctly, it should not need margin.  Option-specialist brokers allow this type of trading in IRA accounts.  You would only need to claim experience or whatever gets you the trading permissions / authority.

 

Do you mind sharing which brokerage this occurred at?  They should just honor the trade, even if their own IRA offering does not allow spread trading at this time.

 

** Nevermind I see Merrill Edge in thread title now

 

Yes, I was initially not going to add the broker name, but then decided to fuck it and throw them under the bus.

 

So it's not like the trade is legally not allowed in retirement accounts, right? I'm hoping then that they come to their senses and allow it because it's their own agents that approved and I really want to sue them for lost earnings if they force to unwind.

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Update: They didn't budge and forced me to cancel the short option trade.

 

Edit:

 

Upon further thought, what is the risk of shorting the higher strike call in your taxable while being long lower strike in your IRA? Assuming the stock is severely undervalued, does it not serve as an effective transfer of wealth from your taxable account to your IRA?

 

The risk I can think of is if there is a massive short squeeze or reverse flash crash sort of event and the stock jumps up like 500% in a day and you get exercised in the naked calls. Of course you'd make a huge profit in your IRA but wouldn't have the liquidity to deliver the stock in your taxable. So then why not just buy a call in your taxable at a higher strike as a hedge against the naked call?

 

At that point:

1) Your downside in the taxable account is limited.

2) You are taking a huge loss with your taxable funds and making it up and then some with your retirement funds, thus creating permanent tax free money.

3) You may not be able to take the tax loss right away because of wash sale but when all is settled you have that advantage as well.

 

What am I missing here?

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Update: They didn't budge and forced me to cancel the short option trade.

 

Edit:

 

Upon further thought, what is the risk of shorting the higher strike call in your taxable while being long lower strike in your IRA? Assuming the stock is severely undervalued, does it not serve as an effective transfer of wealth from your taxable account to your IRA?

 

The risk I can think of is if there is a massive short squeeze or reverse flash crash sort of event and the stock jumps up like 500% in a day and you get exercised in the naked calls. Of course you'd make a huge profit in your IRA but wouldn't have the liquidity to deliver the stock in your taxable. So then why not just buy a call in your taxable at a higher strike as a hedge against the naked call?

 

At that point:

1) Your downside in the taxable account is limited.

2) You are taking a huge loss with your taxable funds and making it up and then some with your retirement funds, thus creating permanent tax free money.

3) You may not be able to take the tax loss right away because of wash sale but when all is settled you have that advantage as well.

 

What am I missing here?

 

 

I think you may be missing the big picture, and that is picking the stock that will go up 500%. You don’t have to use leverage or try to save on taxes if you can pick stocks with high hit rate.

 

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Update: They didn't budge and forced me to cancel the short option trade.

 

Edit:

 

Upon further thought, what is the risk of shorting the higher strike call in your taxable while being long lower strike in your IRA? Assuming the stock is severely undervalued, does it not serve as an effective transfer of wealth from your taxable account to your IRA?

 

The risk I can think of is if there is a massive short squeeze or reverse flash crash sort of event and the stock jumps up like 500% in a day and you get exercised in the naked calls. Of course you'd make a huge profit in your IRA but wouldn't have the liquidity to deliver the stock in your taxable. So then why not just buy a call in your taxable at a higher strike as a hedge against the naked call?

 

At that point:

1) Your downside in the taxable account is limited.

2) You are taking a huge loss with your taxable funds and making it up and then some with your retirement funds, thus creating permanent tax free money.

3) You may not be able to take the tax loss right away because of wash sale but when all is settled you have that advantage as well.

 

What am I missing here?

 

 

I think you may be missing the big picture, and that is picking the stock that will go up 500%. You don’t have to use leverage or try to save on taxes if you can pick stocks with high hit rate.

 

 

Why the sarcasm? It's uncalled for.

 

I think you well understand my concern about some sort of tail event short squeeze or technical glitch that would cause problems for a naked call.

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I don’t think you are missing anything. The position you are thinking about establishing in your taxable account is called a bear call spread in case you want to look it up. I also don’t think there will be a wash sale issue here as long as the options have different strikes.

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Update: They didn't budge and forced me to cancel the short option trade.

 

Edit:

 

Upon further thought, what is the risk of shorting the higher strike call in your taxable while being long lower strike in your IRA? Assuming the stock is severely undervalued, does it not serve as an effective transfer of wealth from your taxable account to your IRA?

 

The risk I can think of is if there is a massive short squeeze or reverse flash crash sort of event and the stock jumps up like 500% in a day and you get exercised in the naked calls. Of course you'd make a huge profit in your IRA but wouldn't have the liquidity to deliver the stock in your taxable. So then why not just buy a call in your taxable at a higher strike as a hedge against the naked call?

 

At that point:

1) Your downside in the taxable account is limited.

2) You are taking a huge loss with your taxable funds and making it up and then some with your retirement funds, thus creating permanent tax free money.

3) You may not be able to take the tax loss right away because of wash sale but when all is settled you have that advantage as well.

 

What am I missing here?

 

 

I think you may be missing the big picture, and that is picking the stock that will go up 500%. You don’t have to use leverage or try to save on taxes if you can pick stocks with high hit rate.

 

 

Why the sarcasm? It's uncalled for.

 

I think you well understand my concern about some sort of tail event short squeeze or technical glitch that would cause problems for a naked call.

 

Sorry, I didn’t mean to. Apologizes.

I had struggles with similar issues before.

Later, i just found it’s harder to buy the correct stock and if I am wrong I want to be able  to unwind quickly. Not using leverage also help me not over think a stock too much.

 

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I had a friend who had a call spread on a stock he had a lot of convictions and had done a lot of research. He bet heavily, pretty much 100% of his stock portfolio. He rolls the options and hold on the spread for two years or so, eventually lost 100%. The stock went up a few times in recent years (after his calls expired).

 

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This has happened to me previously. Needed to call the broker and have them adjust my buying power as their programs are stupid and don't realize that spreads and other covered positions have limited exposure.

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3) You may not be able to take the tax loss right away because of wash sale but when all is settled you have that advantage as well.

 

What am I missing here?

 

This wouldn't show up as a wash sale as trades in IRA account aren't reported. It's a loophole for those that can afford to hold a naked call position in non-tax account.

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  • 2 weeks later...

I don’t think you are missing anything. The position you are thinking about establishing in your taxable account is called a bear call spread in case you want to look it up. I also don’t think there will be a wash sale issue here as long as the options have different strikes.

 

Thanks. Different strikes under the same security are not considered substantially similar? Interesting.

 

3) You may not be able to take the tax loss right away because of wash sale but when all is settled you have that advantage as well.

 

What am I missing here?

 

This wouldn't show up as a wash sale as trades in IRA account aren't reported. It's a loophole for those that can afford to hold a naked call position in non-tax account.

 

While it doesn't show up on the 1099, I believe it is against the rules to sell a stock for a loss in taxable and then repurchase in the IRA. Would cause problems if audited.

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I had a friend who had a call spread on a stock he had a lot of convictions and had done a lot of research. He bet heavily, pretty much 100% of his stock portfolio. He rolls the options and hold on the spread for two years or so, eventually lost 100%. The stock went up a few times in recent years (after his calls expired).

 

 

If he was doing spreads how did he lose 100%? I'm assuming he opened it on one end and was never able to write the covered call at the higher strike in time?

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While it doesn't show up on the 1099, I believe it is against the rules to sell a stock for a loss in taxable and then repurchase in the IRA. Would cause problems if audited.

 

This is true of wash sales (IRS clarified this in Revenue Ruling 2008-5). Selling in taxable for a loss and buying in IRA would trigger a wash sale. This is my take and if I get audited, I'd challenge the IRS to show me a ruling where this was clarified. For option spreads, the two legs are not considered the same security so buying one in IRA and selling one in taxable is not identical.

 

 

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If I understand the trade you are describing correctly, it should not need margin.  Option-specialist brokers allow this type of trading in IRA accounts.  You would only need to claim experience or whatever gets you the trading permissions / authority.

 

Do you mind sharing which brokerage this occurred at?  They should just honor the trade, even if their own IRA offering does not allow spread trading at this time.

 

** Nevermind I see Merrill Edge in thread title now

 

Yes, I was initially not going to add the broker name, but then decided to fuck it and throw them under the bus.

 

So it's not like the trade is legally not allowed in retirement accounts, right? I'm hoping then that they come to their senses and allow it because it's their own agents that approved and I really want to sue them for lost earnings if they force to unwind.

 

Have you tried Interactive Brokers? They are the only brokerage I've used who will let you do pretty much whatever trade you want inside an IRA. Cash covered options spreads are calculated correctly. Cash used to cover the call is designated "maintenance margin" and is subtracted from cash available to trade.

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Have you tried Interactive Brokers? They are the only brokerage I've used who will let you do pretty much whatever trade you want inside an IRA. Cash covered options spreads are calculated correctly. Cash used to cover the call is designated "maintenance margin" and is subtracted from cash available to trade.

 

I have not, but I likely will be in the future. Merrill is so easy since I bank with BofA, and everything is free. Of course I am not counting what I am losing with worse execution and more restrictions.

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