Hidden Ways to BULLETPROOF Your Stock Position

In this issue you’ll discover a hidden source of fuel for BULLETPROOFING your stock. Here’s a little-understood phenomenon in trading an ITM (In-The-Money) put option with a stock: as your stock goes up, the time value in your put may actually go UP. Very often I will hear an objection to buying a married put: “You CAN’T make any money with that idea because as the stock goes up, the value of your put goes down!” Well, kinda…

See, while it’s true that a put will normally lose value as a stock goes up, it almost always does so at a different rate.

Because of this, you are protected against a BIG slide down… but as the stock goes up, your NET position almost always goes up as well if you have purchased your put option correctly.

Take this example from the RadioActive Trading Archives:

Now I want you to notice something about the put option above… like many options, its pricing is split into two separate components: Intrinsic, or REAL value… and Extrinsic, or “TIME” value.

The intrinsic value is the portion in a married put position is that part that is guaranteed to come back, no matter what, on or before the expiration date. In the case above, four of the five dollars invested in the put is intrinsic. Its value is “real” because it’s guaranteed. See that? Because the put’s Strike Price is $119… $4 of the $5 invested will definitely come back if I exercise the put and sell the shares I bought for $115.

Out of the $120 net investment for this position, $119 is guaranteed back. The remaining $1 that I put into this trade is the extrinsic, or “time” value of the option.

As expiration approaches, the time value will go to ZERO. Guaranteed. BUT..! Before that happens, if you have purchased your put correctly you may see the time value portion of your put actually go UP. Here’s why:

The pricing of the time value in an option contract is affected by many things: volatility in the stock, time remaining to expiration, the risk-free interest rate, and my personal favorite… the nearness of the stock to the option’s strike price.

Let’s see what the DIA RPM looked like 24 days after its setup:

If you’ll notice, the value of the put is DOWN when the stock is up… which is to be expected. As the stock went up, the INTRINSIC value of the put went down, dollar for dollar. At the same time, the TIME VALUE of the put went UP!

Think about it. The $119 put had cost me $5 in the setup. Only $1 of the $5 that I spent was time value. Here, 24 days later that same put is priced at $2.05.

That means that the time value in this put option DOUBLED while the net price of the stock and the intrinsic portion of the put remained unchanged.

This phenomenon of “time” value actually increasing after the purchase is what Income Methods #3 and #4 are based on. At RadioActive Trading, we use this time value to “BULLETPROOF” the stock so that it’s no longer possible to lose any money in a position but is IS possible to gain more.

To learn what I did next in this story… as well as receive an invitation to the upcoming “Profits with Puts” Online Seminar.