I’m allowed to trade options in my Charles Schwab Roth account, so he’s probably using a traditional IRA or a Roth.
Have you read through IRS PUB 590? There are many restrictions that are prohibited in a Roth IRA that are permitted in a Traditional IRA such as:
Using Margin because you are not permitted to use stocks in a Roth IRA as collateral for a loan. It appears the way around this is for the Roth Margin trader to post a cash balance with the brokerage firm as collateral.
Here's an excerpt from Investopedia:
Roth Restrictions
Many of the riskier strategies associated with options aren’t permitted in Roth IRAs. After all, retirement accounts are designed to help individuals save for retirement rather than become a
tax shelter for risky
speculation. Investors should be aware of these restrictions in order to avoid running into any problems that could have potentially costly consequences.
IRS Publication 590 contains a number of these prohibited transactions for Roth IRAs.
The most important of them indicates that funds or assets in a Roth IRA may not be used as security for a loan.3 Since it uses account funds or assets as collateral by definition, margin trading is usually not permitted in Roth IRAs in order to comply with the IRS’ tax rules and avoid any penalties.
Roth IRAs also have contribution limits that may prevent the depositing of funds to make up for a
margin call, which places further restrictions on the use of margin in these retirement accounts. These contribution limits change each year. The annual limits for 2020 and 2021 are $6,000 for people under 50 and $7,000 for those 50 or older, according to the IRS. These limits do not apply to rollover contributions or
qualified reservist repayments.4
VIX calendar spreads, and short combos are not eligible trades in Roth IRAs because they all involve the use of margin. Retirement investors would be wise to avoid these strategies even if they were permitted, in any case, since they are clearly geared toward speculation rather than saving.
Different brokers have different regulations when it comes to what options trades are permitted in a Roth IRA. Fidelity Investments permits the trading of
vertical spreads in IRA accounts with only $2,000 set aside as a reserve.5
Charles Schwab Corp. (SCHW) requires a balance of at least $25,000 for spread trading.6 The brokers permitting some of these strategies have restricted margin accounts whereby some trades that traditionally require margin are permitted on a very limited basis.
The use of these strategies is also dependent on separate approvals for certain types of options trades, depending on their complexity, which means that some strategies may be off-limits to an investor regardless. Many of these applications require that
traders have knowledge and experience as a pre-requisite to trading options in order to reduce the likelihood of excessive risk-taking.
active trading, experienced investors can use
stock options to hedge portfolios against loss or generate extra income. These strategies can help improve long-term
risk-adjusted returns while reducing portfolio churn. Safeguards should be taken so that the options do not seem like a mere speculative tool in these accounts, in order to avoid potential problems with the IRS’ rules and taking on excessive risks for funds slated to finance retirement.