You do give up a small amount of upside by having a put in place, but it’s nothing like selling a covered call. For example, in October 2002 I got AMZN at $16.09 plus a Jan 2005 $20 put. IN the next thirteen months AMZN went over $63. Had I sold a covered call, I would not participate fully in that upside.
IN 2007 I got 200 shares of STP at $39.99. AFTER making them bulletproof by doing the Income Methods, I sold some in November at $60.85, and some in Jan 08 at $66.25. Those are high returns, I think…
Last month (August 2009) I was playing shares of MVL that I had bulletproofed using an IM#4 variation. I took out another $1.05 with IM#6, and afterwards, participated in the ten-point move she made on Aug. 31. MVL was bulletproof, I owned the shares, and when she went up I not only sold the stock for about a 30% profit but I also sold the put separately when MVL began to settle back down.
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These are just a few examples of “leaving the upside open” before a big move and I have many more: CROX, GOOG, PCLN, (actually, PCLN several times), SWN, etc come to mind…
Once a stock has been bulletproofed by paying for the time value portion with the Income Methods, when there is no call sold against it is essentially a “hockey stick graph” with the break-even line missing. That is, unlimited upside, no downside. I don’t think it gets better than that 😉
I'm Kurt Frankenberg, and I have discovered how to truly put the odds on the side on the individual investor.
Your married put is the same as a long call. Why not buy a leap and use the same techniques?
Hi John! It looks like you haven’t had the opportunity to really read through this site, so I’ll cut you some slack. However! It’s incorrect and downright dangerous to say that a married put is “the same” as a long call.
The short answer to your question: “WHy not buy a LEAP [call] and use the same techniques” is this…. The most popular trading systems or options trading courses don’t take into consideration the most important part of trading: position sizing.
The first principle of RadioActive Trading is FIST: Force Ideal Sized Trades.
Say you have $10K to trade. Looking at CTSH LEAP options, you can “afford” to buy 20 contracts of the Jan 2011 $45 calls for $5 apiece.
Total Investment: 20 contracts X $5.00 = $10,000.
On the other hand, with $10k you could only buy 200 shares and 2 Jan 2011 $45 puts. The “RadioActive Profit Machine” (my name for an in-the-money, far out expiration married put position) for this issue would look like this:
shares of CTSH $39.13
Jan 2011 $45 puts $10.30
Total Investment $49.43 X 200 shares, 2 contracts = 9886.
Now, the risk/reward graph on both the positions will LOOK “the same”. The “hockey stick” graph will have about “the same” slope. The gap between break even and maximum loss will be about “the same” distance.
But the reality is that in the pure options play, you have $10,000 AT RISK. In the married put scenario, on the other hand, there is only $886 AT RISK.
That’s because out of the $9886 invested, $9000 is guaranteed back because of the 2 $45 put options.
So here’s where my critics shout “No fair! You’re comparing 20 call contracts with only 2 blocks of 100 shares plus 2 contracts.”
And it’s where I say, “YES, fair. Because You’re comparing what you could do with $10K and what I could do with $10K. Same underlying stock, same strike, same expiration… but I put much, MUCH less AT RISK. It’s what an in-the-money married put FORCES me to do. If I use all my capital for either trade, only one of them forces me to risk less.
So if the critics want to push the argument further and say, “Well then I would only trade 2 call contracts. That would free up more money for other options trades.”
Well, even if we’re limiting position size there’s a disparity. Because if we buy 2 long calls it’s 2 X $5 per contract = $1,000 AT RISK… compared with the $886 AT RISK in the married put trade.
Where’s the other $114 come from? Well, the pricing of the options contracts take the risk free interest rate into consideration. WIthout getting too fancy with Black-Scholes, suffice it to say that our pure options player doesn’t REALLY have the rest of his capital “freed up” for trading… the $114 represents what he would be able to collect if he tied up that capital anyway in a safe interest bearing instrument.
The reason I buy the stock and a put instead is that I see this interest up front in the form of a discount on the put’s purchase price. THERE’s your equivalency. Afterwards, there are a number of adjustments (the so-called “Income Methods” that I can use afterward that are available to anyone that has the trading clearance to sell covered calls.
By educating people on what IS and what ISN’T true equivalence, I’ve been able to help people understand the true risks.. and more importantly, how to secure the rewards… of using options to protect enhance their stock portfolios.