Is Trading Stock Only Better than Married Put Trading?

Q: Just adding up your columns in the Fission track records has the stock only return indicating 343.4% while the RPM method incurring 681 transactions returned 275.3%. Again, in the Ernie@PowerOpt Portfolio, stock alone returned 131% while the RPM method incurring 113 transactions returned 63%. Seems to me the stock only would be the way to go, higher returns, less transactions, etc.?

A: In a perfect Bullish world, where the market always goes up and we did not have to worry about downside losses, owning the stock straight out might always be the better trade.

In the examples that you saw on the track records the ‘Stock Only’ return was higher in some cases, BUT, neither Kurt or Ernie or most investors would have stayed in those positions during that whole time span.

In Ernie’s Wyeth Labs trade he was able to make a 19% profit on the position by applying the RadioActive Trading Methods. Holding just the stock over the same period of time would have resulted in a -6.7% loss. Ernie opened the position when the stock was trading at $44.89…at one point the stock had dropped to $28.00 per share. This would have been a loss of 38% on the total investment (which would require almost a 60% gain to get back to break even).

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Ernie was able to stay in the position because he had the protective put in place. The stock could have dropped further, and Ernie would have only suffered a loss of less than 10% on the entire position. This is the advantage of the RadioActive Trading Methods.

If you open a straight stock position, where do you place your stop order?

Do you exit the position if the stock falls 8%?

Do you exit the position if the stock falls 15%?

Do you exit the position if the stock falls 20%…or do you still hold on hoping the position will come back?

If it never comes back, what is your limit for the loss you are willing to take…and can your portfolio keep sustaining those types of losses?

As traders we know that we need to limit our losses and let our winners run. But, even with all the tools out there for detailed fundamental, technical and trade timing we have to admit that we cannot tell the future nor can we constantly predict winners. The market moves in cycles. The only thing we can control on our positions is the amount of risk we are willing to take. We cannot constantly predict winning trades nor the percentage return we will make on those trades…but we can guarantee that we can enter positions with limited risk values of less than 10%.

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But we can’t get something for nothing…in order to protect ourselves we do have to pay for the insurance policy. This will reduce some of the gains if the stock moves straight up in price, but we are also in a much better position if we were wrong in the direction of the underlying stock. Even if the stock drops 20, 30 or 40%, the risk is limited to single digit amounts. We can also apply the various income methods to reduce the at risk amount and put ourselves in a better position if the stock rebounds in price. We do not have a stop-loss that is triggered to close out our stock at a significant loss…we control when to get out of the position, but we are guaranteed to only have a limited loss.

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Ernie recently told me an interesting statistic:
Over the past 30 years or so, Mutual Funds are up about 12%. Over that same time period, retail investors investing in Mutual Funds are only up about 5 or 6%. Why are the retail investors gains only 50% of the funds themselves? It is because most investors panic and pull out their money after the stocks have dropped; then buy back in after the market has already moved up.

Instead of trying to time the markets and expecting that over time all of your stocks will move up, wouldn’t it be better to hold stock positions that are guaranteed to lose only a small amount even if the stock had dropped 20, 30 or 40%, but still take advantage of the unlimited upside profit potential? Yes, we may have to sacrifice some of the gains to control our risk, but we also never have to worry about closing a position for a 30, 40 or 50% loss.

About Mike

Michael Chupka is the Director of Education for Power Financial Group Inc., publisher of PowerOptions, a patented online suite of options investment research and analysis tools. He has co-authored two books, the first on Naked Put strategies and the second on the protective Married Put and Collar strategies.