Roth IRA options for tax arbitrage?

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ThrustVectoring
Posts: 498
Joined: Wed Jul 12, 2017 2:51 pm

Roth IRA options for tax arbitrage?

Post by ThrustVectoring » Wed Mar 07, 2018 3:20 pm

So, IRA accounts can go long option contracts, and one interesting fact about options is that long call + short put + cash = long underlying. And there is a healthy options market on the S&P 500, allowing you to have a synthetic long position fairly cheaply.

If your account balances are large enough for minimum contract sizes, you could replace 100 shares of SPY or VOO with a synthetic position. But, you don't have to have the legs in the same accounts. You could put the call options in a Roth IRA, and write the put in your taxable account. The advantage is that your portfolio gets favorable tax treatment from market movements. Specifically, the upside of market gains gets realized largely in your Roth IRA, while the losses get realized as short-term capital losses in your taxable account. (This all is less the option premiums paid and received, which work backwards).

Is there anything I'm missing in terms of tax treatment or execution? I haven't actually tried this so I don't know how it would go, but it seems like it ought to work. You likely want a strike price slightly above the current market price, depending on how much cash is in your Roth IRA and taxable accounts. You also probably want an expiration date somewhat far out in the future to minimize the time decay transferring value from your Roth call option to your taxable short put option. (On the other hand, having it further out in the future means you have less implied leverage, which requires larger account balances to get the same amount of risk transferred.)

Thoughts?

ThrustVectoring
Posts: 498
Joined: Wed Jul 12, 2017 2:51 pm

Re: Roth IRA options for tax arbitrage?

Post by ThrustVectoring » Wed Mar 07, 2018 4:33 pm

On further thought, this doesn't work - it's just a well disguised long volatility strategy. If you also did a similar situation with a synthetic short, you'd just be long a straddle in your Roth IRA and short it in your taxable account. Overall, I suspect that if you do the math, the expected flows from Roth to taxable in flat markets is the same as the expected flows from taxable to Roth in turbulent ones.

Leaving this up because people might find it interesting anyways.

bogglehead125
Posts: 51
Joined: Thu Nov 23, 2017 9:40 pm

Re: Roth IRA options for tax arbitrage?

Post by bogglehead125 » Fri Mar 16, 2018 8:43 pm

Seems vaguely similar to getting (1+x) times levered long SPY in your Roth and x times short in your taxable. If you could get leveraged and short for free then this would seem like a good thing to do for small x if you believe stocks have positive expected return.

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