# Trading options in TFSA (bizarre contribution-limit question)



## lu1sa (Feb 25, 2015)

So my TFSA is approved for option-trading, but I have question about the long-calls I'm buying: let's say I have contributed $20,000 to my TFSA and have zero contribution room left. Let's say I buy $20,000 in long call contracts, and the stock price increases and I want to exercise the contracts (let's assume I want to do this because it was a thinly-traded option with a wide spread, so I would have gotten screwed by trying to sell them back, so I just figure why-not: I'll exercise + take possession of the stock, which is worth, let's say $50,000, after which I can sell it in the market if I wish.).

HOWEVER, I'd need to have sufficient funds in my TFSA to be able to actually BUY the stock that I'm exercising the options for, right? In other words, that $20,000 was spent on the option premiums in order to buy the option contracts in the first place...my trade worked out, but I still need to come up with the money to BUY the underlying shares I'm exercising the options on, right? How do I get money into my TFSA to do so when I have zero contribution room left?

Am I missing something? I have to think that if the gov is allowing margin/options trading within TFSA account, there's got to be some sort of provision for circumstances like the above, where a person needs to deposit additional funds because of an option exercise, right?


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## gibor365 (Apr 1, 2011)

Not expert on options  but the same can happen with any registered account.... and generaly speaking you can overcontribute to TFSA/RRSP, but you cannot to LIRA...
so, you should sell your other holdings or you get screwed


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## Eclectic12 (Oct 20, 2010)

Re: Need to get money into a TFSA when there's zero contribution room left

You need to avoid this situation as any funds put into the TFSA when there is zero contribution left is an over-contribution, subject to penalty. 

If CRA decides it's run of the mill situation, this will be *1% per month* that the over-contribution exists. If CRA decides the over-contribution was deliberately made for a gain ... they can levy a higher penalty (I recall reading 100% of gains).




lu1sa said:


> ... Am I missing something?


What you are missing is that the gov't expects those using options to understand the rules so that what is done will leave a buffer and avoid such situations.




lu1sa said:


> ... I have to think that if the gov is allowing margin/options trading within TFSA account, there's got to be some sort of provision for circumstances like the above, where a person needs to deposit additional funds because of an option exercise, right?


I don't think so.

Allowing those using options to contribute more goes against the whole idea of everyone having to stick to the limit or a level playing field.


Now one can bail oneself out by deliberately over-contributing and withdrawing as soon as possible ... but one should not do this regularly as one may lose everything one has gained. Then too, if enough margin/options type issues crop up from the TFSA ... I expect that the gov't may decide to ban margin/options as one way to avoid the issue.


Cheers

*PS*

Maybe you are getting used to the forum ... but I suspect the "Taxation" or "Investing" sections would apply more directly than "Retirement", as well as have a better chance of quality responses :biggrin:


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## humble_pie (Jun 7, 2009)

lu1sa said:


> ... TFSA and have zero contribution room left. Let's say I buy $20,000 in long call contracts, and the stock price increases and I want to exercise the contracts (let's assume I want to do this because it was a thinly-traded option with a wide spread, so I would have gotten screwed by trying to sell them back ... HOWEVER, I'd need to have sufficient funds in my TFSA to be able to actually BUY the stock that I'm exercising the options for, right? ... How do I get [over-contribution] money into my TFSA to do so when I have zero contribution room left?



lol you have no choice in TFSA but to sell those options each:

the one-eyed market maker is waiting for you


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## 0xCC (Jan 5, 2012)

I know I'm quite late to this thread but I was looking for another thread but found the title of this one interesting. 

Isn't another option to transfer the options outside the TFSA and then exercise them in a non-registered account? It isn't an ideal situation but it is better than paying penalties. Also this is a situation that the TFSA holder got themselves into and having an empty TFSA until the following calendar year is the price to pay for not really thinking the whole option strategy through...


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## humble_pie (Jun 7, 2009)

sounds like a good idea but since brokers don't allow contributions in kind except for new contributions each year, i'm left wondering if brokers allow withdrawals in kind?

WDs in kind could more likely be possible than contribs in kind. The party would have to check with his broker. One notices that different brokers have minor differences in interpreting the directives they receive from the ministry of finance re administration of registered accounts.

the best solution would be to learn how the options specialists run their shops, sell those lucrative options that have risen in price so much, right there in the TFSA, for best price he can raise from the dealer, receive with joy all the lovely tax-free profit that he will collect in his TFSA & pour himself a congratulatory single malt.


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## OptsyEagle (Nov 29, 2009)

HP, I think you might be thinking about RRSP asset swaps, that have been discontinued by brokers. I do believe most brokers still allow contributions in-kind and withdrawals in-kind.


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## humble_pie (Jun 7, 2009)

^^

you're right, i might be! one broker doesn't allow, i don't know about the other one, maybe they do!

my main point is why doesn't our friend swallow his medicine? the taste is sweet & delicious profit, not bitter loss.

he has a wonderful TFSA position, he just has to accept that the one-eyed market maker is going to extract something close to a pint of blood, if he has enough time he can dither & futz with the market maker so as to get a better price in TFSA, after that he's going to score all that wonderful tax-free capital gain.

then on to celebrate with the veuve cliquot brut or the lagavulin


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## drFatCat (Feb 16, 2017)

lu1sa said:


> it was a thinly-traded option with a wide spread


Can you place a Sell order in the middle of the spread and just Buy them from your regular Margin account? Then execute as you initially planed?
I realize you'll pay commission twice, but if the spread is big enough could still be cost effective.


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