Option spreads in registered accounts
Are there any option brokers for canadian people that allow you to do credit and debit spreads in their rrsp and Tfsa accounts?
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From my own personal experience, you cannot trade spreads in RRSP or TFSA accounts in Canada. You can only buy options (buy a call or buy a put) or you can sell calls against your stock (covered call selling). You will not be able to sell naked options, or trade any type of spread or combo (calendars, condors, etc). I am not sure why these are the rules, but they are at least where I trade those accounts.
The answer by Gungunus vossmor is incorrect. While it is true that if you sell options, you have the possibility that you may owe more money than you are allowed to put in, the same situation also happen when you buy options and they expire in-the-money.
For example, if a put option that you bought in your registered account expired in-the-money, you would be short the stock, which is illegal in a TFSA! And yet, buying puts without the stock is absolutely allowed by the CRA. For a call, you'd be buying the stock and may not have the cash available. And yet..buying calls is allowed.
The CRA doesn't allow spreads at all, and it is most certainly because it represents leverage and opens the door to speculators, and they do not want people to not make too much money in the TFSA or run a trading business there.
The TFSA is a tax-free account, so it is also not true that "They get their taxes eventually". It is not tax-deferred like the RRSP. There is just a lot of smart-sounding falsehoods in that reply.
What actually happens if you buy options and they get exercised and you don't have the cash to buy the stock is at the discretion of the broker, and what the brokers in Canada seem to do is you simply lose your paper profit. In other words, you have to close your positions before they expire in-the-money or your paper profit is gone. They are not going to sell them for you and give you the difference, they're either cancelling the option or keeping the profit because at that point the position violates the rules of the account so it's deemed your fault.
No, it is not the nefarious government preventing Registered Account traders from making money. They get their taxes eventually.
A registered account has legal limits to the amount in a year a person can contribute to their account. How much money they earn within the account has no limit.
If you trade naked options, there exists a condition (a bad trade) that may actually have you end up owing more money then you have in your account. In a "normal" account, you merely fund your account with more money out of your pocket to repay your debt.
But you cannot exceed the contribution limit to fund your registered account. Thus, there exists a possible condition that you cannot pay back your broker without breaking the law. If you owe ,000 but have a contribution limit of ,000 a year (as in Canadian TFSA), you cannot repay your debt without exceeding your contribution limit. And your broker cannot lend you money to repay your debt. Any loan into a Registered account counts toward the contribution limit. So your broker can't even "bail you out" with a loan in a Registered account. You simply cannot have a debt in a Registered account.
The broker cannot compel you to break a law. So an impasse - you legally owe money that you cannot legally repay.
To eliminate the possibility of this occurrence, the broker does not allow you to make trades that have the potential of you owing money that you cannot repay. Hence, registered accounts prohibit naked trading (ie: shorting stocks and selling options, with the exception of covered calls since there is an underlying asset that covers the short).
So you will say, "Well, if I do a hedge strategy that includes offsetting calls and puts, then there is limited risk...."
But now you have a condition of your broker FORCING you to agree to an additional CONTRACT (the hedge) - he has to COMPEL you to agree to another contract in order for you to exercise the first contract. This breaks Contract Law. No one can force you to accept a contract as a condition of another contract. Remember options are CONTRACTS, not assets. Each option contract is a standalone contract, with fixed set of conditions. There is no "adding an additional condition of a hedge" to this option contract - no such condition exists in options.
You may enter the trade with a hedge, but nothing in the contract prevents you from selling the hedge - there is no contract condition in an option that says "here is the strike, expiry, price and stock...and you can't close this option unless you close the other option at the same time" - the last condition does not exist in an option contract, and therefore, you could still end up with the potential of being naked, and potentially legally owe money you cannot legally repay.
Covered calls become the natural exception. No one forced you to buy shares. And you freely accepted the covered call contract. Thus your broker is not at risk of compelling you to break the law (fund your account losses, since you have assets already in place) nor is there any compelled contract (you voluntarily assigned your shares as part of your covered call).
What is a shame is that almost no one understands the reasons for these restrictions - not even the brokers. So they make up some strange explanation about "being too risky" as if holding shares have no risk..... Someone trying to explain this to brokers said "there is too much risk in losing all and more money in the account..." and the brokers brain turned off to the rest of the explanation - leaving the "it's too risky" comment stuck in their brains. Then the account holders think about that comment, thinking "gee, lady, everything in stock trading is "too risky"... why draw the line here and not there?" and no one can answer that well at all. But now the truth of the matter is exposed.
Now some smart cookie can invent a new option contract that includes a hedge - call it "Dual Option Option", that includes a hedge. But this is problematic as you, the investor, would have no say in the variables of expiry, strike or premium on the sub-part derivatives, but only on the combined new derivative. Getting complicated to figure out the price and value of such a beast - which is probably why this hasn't been produced yet. But maybe one day....
No evil here (other than the restriction on contributions.... but that is another argument....)
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