Brokers are rarely able to collect from people who blow their accounts out due to huge up/down gap. Usually if someone's stupid enough to do that to themself, they don't have the money to pay back any further losses. Every broker has bad receivables due to idiots on margin. That's why the margin requirements are so high, they don't want that risk.
The original post was about IRA restrictions. The IRA trades like a naked put have to be cash covered. What risk is there to the broker if the naked put is cash covered? I am assuming the broker made you sign an acknowledgement of risk.
ssmenger, all the reasonable brokers let you trade cash-covered puts in IRAs, or anything (like spreads) with DEFINED RISK. Some places are just unreasonable, that's all.
Thank you all for your informative replies. Some options spreads have limited profit potential and unlimited risk. If brokers allow people to place these spreads (e.g., short staddles and ratio verticals), then essentially the brokers give these clients "unlimited credits" and hope they would be "responsible for their own purchases" -- to quote from FullyArticulate. As I recall, some years back, COMEX was in trouble because some traders were short a large number of options. I assume these were experienced traders. I also recall the story of Vanderhoffer who blew up, and he was a veteran trader too. Considering expectancy and fat tail, new traders blow up often but probably in small scale; some veteran traders occasionally blow up, but could be enough to bring down the house. Which is better for the broker? Anyway, I don't want to be handicapped in trading and want to have at my disposal the full spectrum of option strategies. I can ask IB to give me a test, closed book and proctored, if required. Now the question is, did you have to go through a series of challenging obstacle course to prove you are worthy to kiss the graceful hand of a king's daughter before your broker allows you to trade short straddles, ratio verticals, etc.? Or is this a moot point as long as you have sufficient capital?
That's probably true on both accounts. Brokers that require approval for add'l levels of option trading will let you start will covered calls and long options but will initially restrict you from spreads. Now whose ass are they covering??? LOL
Last I knew, it was a simple 20 question online test. Well, simple if you have a clue about options No series of challenging obstacles. If you have the approval and you have sufficient capital, they'll let you play with the king's daughter, no matter what she looks like.
short straddles are not spreads, they are short straddles. a spread is either a calender, vertical, or diagonal spread. No IRA is going to let you trade short straddles, those have undefined risk. Now, if you want to do an iron condor/butterfly, that's a different story.
Maybe thinkorswim is shy about collecting for a margin call in an IRA account, but if the following thread is true, IB is not. http://elitetrader.com/vb/showthread.php?s=&threadid=51251 The OP allegedly had, in an IRA account, long calls in GOOG that were autoexercised, had GOOG shares put into his account which were autoliquidated for a loss. IB allegedly took the money for the margin call out of one of his non-IRA accounts.