A BULLETPROOF Trade and Why it Pays to be Bulletproof

In today’s issue, the single most important piece of your trading puzzle: RISK MANAGEMENT.

I’m going to take a moment to talk to you about a RadioActive Trading term, BULLETPROOFING – that is, taking a stock and option structure and converting it from low risk to NO risk… and why it’s important in this market to be familiar with how exactly to do that.

As you may know, I trade two accounts: Fission’ R3, which stands for Real Time, Real Money, RadioActive – and the Plain Vanilla portfolio.

You’re receiving this letter because you signed up to get Plain Vanilla updates. ONE of those updates turns a good trade into a GREAT one.. a BULLETPROOF one… and the other shows the great importance of having a loss management plan in place.

(BTW, Plain Vanilla is NOT a real money account and here’s why: If I’m going to trade real dollars, I’ll use ALL TEN “Income Method” adjustments that are available to me as a RadioActive Trader, not just IM#1: Selling a Covered Call. But..! To show the world how effective RadioActive Trading is for protecting your bottom line, and to demonstrate the potential of using just the initial setup plus ONE Income Method… I “virtually” trade the Plain Vanilla portfolio.)

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SO here’s the deal… I just “sold” covered calls against my LFC position. They are the November $70s, for $3.10. The last time I sold calls against LFC it was July 30, and I sold the August $70 calls for $1.60 after which they expired worthless. That’s $4.70 in premiums collected so far, and there’s still a bit of time left until January 2010!

NOW here’s the deal… I “own” 200 shares of LFC, as well as 2 Jan 2010 $65 put options. That gives me the right, but not the obligation, to sell LFC at $65 til January… and my total cost for both the stock and the put equals $69.62.

Stay with me now… because it gets exciting quick. With a total cost of $69.62, and an exit GUARANTEED at $65, my AT RISK amount was the difference of $4.62. Now go two lines up and read again where I’ve collected a total of $4.70 already.

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What this means is that I can no longer lose ANYthing in this arrangement. It’s BULLETPROOF. And, come November, I may elect to sell calls again if the November calls expire worthless. If they don’t, I’ll collect all of my initial investment back, plus $1000, and be holding some put options that expire two months later and will certainly be worth something.

…and don’t forget: this is only ONE of TEN ways I squeeze a stock and put option position for the biggest payoff possible.

Okay, so after looking at a that CAN’T lose… let’s look at one that DID… but no where what it could have.

DRIV just about cut in half on Monday, and she was in the Plain Vanilla Portfolio also.

We started with 300 shares of DRIV at $38.53… today she’s trading at $25.61. That’s $12.92 or a 33.5% loss!

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Fortunately, by buying 3 Jan 2010 $45 put options for $9.20, I got to close the whole deal for the locked in exit price of $45. When you invest $47.73 and close at $45, that’s a 5.7% loss… much, MUCH nicer.

Now, let’s break out a trusty calculator: when you suffer a 33% loss (this would have been just a little MORE than that, but it’s close), you would need to score a 50% WIN on your next trade to make up the difference.

On the other hand, what does it take to counteract a 5.7% loss? Just a 6.04% gain.

You tell me… what is more likely to happen with your next successful trade… a six point gain or fifty freakin’ percent?

You guessed right… You’re much more likely to hit singles than home runs. Though they are possible, I wouldn’t be the mortgage money on ’em.

Looking at the two examples above… one that is guaranteed NOT to lose any money whatsoever… and another that COULD have been a debilitating loss with an overnight gap (translation: a “stop” order wouldn’t help you one bit)…

… it’s not hard to see why RadioActive Trading Fission’ Portfolio (traded with real dollars and real time updates) is UP over the last thirty months.

Even the arduous market of October and November last year couldn’t hurt a RadioActive Trader too badly… and while many are still bemoaning the loss in their mutual funds over that period of time and wondering when they’ll come back…

RT is up more than full strength.

Listen, I don’t know about you… but I’m in the business of making sure I DON’T LOSE. By taking care of that… the “winning” part of my trading takes care of itself.

I’d like to invite you to start taking advantage of our free, twice-weekly trading Webinars at http://www.radioactivetrading.com/webinars.asp.

Come and take a look. See what others have been saying. Then learn how to begin with low risk… in case of an over night, 30%+ gap… and perhaps convert to NO risk… like I just did with LFC… and perhaps even enhance the returns on winners by using one or more of the other “Income Methods”.

About Kurt Frankenberg

Kurt Frankenberg is an author and speaker about entrepreneurship, martial arts, and trading the stock and options markets. One of several "Biznesses" he founded as a teen, The Freedom School of Martial Arts, has been in continuous operation since 1986. Kurt lives in Colorado Springs with his wife Sabrina, German Shepherd Jovi, and his ninja cat Tabi.