Question from a reader:If I adopt option strategies in my retirement account, are some strategies better than others? Will my broker limit my choices?

Yes, your broker will limit your choices because some option strategies are considered (by the people who have the power to establish the regulations) to be far too risky for a retirement account. One such strategy is the sale of naked call options, and the SEC does not allow anyone to use that strategy in an IRA.


 Other strategies are too risky for the novice investor. 

If you don't want anyone limiting your choices -- even when it is in your own best interests -- then you can find a broker that allows any trader (even novices) to trade almost any option strategy, as long as you can meet the margin requirements.
 

What about writing covered calls and/or cash-secured, naked puts? I feel less stress when I own such positions.

These two equivalent strategies tend to be less stressful for the investor because they involve setting money aside for your future, with less risk of sustaining a substantial loss. Note that neither strategy fares well when the bear is in control of the markets, but losses are smaller for covered call writers and for put sellers than they are for traditional stockholders. 

When investing, understand that there will be good times when your account value grows and bad times when your account value declines. However, if you do not try to time the market and if you accept the good with the bad, then the probability is high (based on almost 30 years of stock market history) that you will attain a better result with these methods than with a simple buy and hold strategy.

Of course the probability of success is less than 100%, but when investing in a retirement account with less risk (and less potential reward) you are doing something intelligent.

One advantage to your chosen  option strategies is that they tend to make the value of your account less volatile. In other words, the ride is smoother.

• You will have more years in which your account is profitable because "flat" markets are profitable for those who adopt these two methods.
• You will lose less money than "regular" stockholders when the market declines.
• You will earn less when the market surges, but the profits can be substantial
• Overall, you should expect your performance to be slightly better than the simple buy and hold strategy -- based on the historical performance of the BXM and PUT indexes.

You are selling naked puts right now, but for many traders writing covered calls feels safer. That is an illusion. As long as you maintain the same position size (i.e., write no more than one cash-secured put option for each 100 shares that you would have bought if you were writing covered calls) it is not any safer because these two strategies earn the same profit or loss when the call or put being sold has the same strike price and expiration date.

If you decide to decrease risk and profit potential even more by buying a farther out-of-the-money put for protection, then you would be selling put spreads -- and in turn, that would be exactly equivalent to owning a collar. 

I've heard of equivalent positions. Are these strategies really equivalent?

Yes, they are equivalent mathematically.  But there are always psychological factors to consider. If any trader feels that it is "better" or "more profitable" or "safer" or just "more comfortable" to trade one position rather than the other, then for that trader, the positions are not equivalent because one would produce more mental strain than another. Mental strain can lead to errors in judgment when managing the position. Mathematically it makes no sense to treat the two strategies differently, but we are human, and our emotions can get in the way of logic.

Bottom line: If you are willing to take the risk (as 99+% of all investors do) of a severe decline, then you are using a good strategy. If you prefer a more conservative risk management plan, then selling put spreads is something to consider.