Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

Disable ads (and more) with a membership for a one time $2.99 payment

Prepare for the Series 6 Exam with our comprehensive quiz. Engage with flashcards, multiple choice questions, and detailed explanations. Enhance your knowledge and get ready to succeed!

Each practice test/flash card set has 50 randomly selected questions from a bank of over 500. You'll get a new set of questions each time!

Practice this question and more.

Is the writing of covered calls allowed in retirement plans under ERISA?

Yes, it is allowed
No, it is not allowed
Only with specific conditions
Only for certain types of plans

The correct answer is: Yes, it is allowed

Under ERISA (Employee Retirement Income Security Act), the writing of covered calls is indeed allowed in retirement plans. Covered calls refer to a strategy where an investor holds a long position in an asset while simultaneously selling call options on the same asset. This strategy can generate income through premiums from the call options while the investor continues to hold the underlying asset. Retirement plans, including qualified plans such as 401(k)s, may engage in options trading as long as the transactions adhere to prudent investment principles. It is crucial for fiduciaries overseeing these plans to ensure that such strategies align with the overall investment strategy and risk tolerance of the plan participants. While some restrictions and conditions may apply—such as ensuring participants are adequately informed about the risks involved—ERISA does not outright ban the execution of covered calls in retirement plans. Therefore, this strategy can be permissible, making the answer that it is allowed the most accurate response.