Comments on: Why TEN Income Methods? Part 2 http://blog.radioactivetrading.com/2009/10/why-ten-income-methods-part-2/ This trading methodology shows you how to protect your downside and leave your upside totally open for growth. Mon, 06 Sep 2010 13:21:52 +0000 http://wordpress.org/?v=2.6.2 By: Paolo Busi http://blog.radioactivetrading.com/2009/10/why-ten-income-methods-part-2/#comment-4497 Paolo Busi Tue, 23 Feb 2010 11:36:31 +0000 http://blog.radioactivetrading.com/?p=196#comment-4497 I agree on the fact that in this case bear spreads can be more versatile than covered calls (provided that the strike of the short call is >= to the put strike). As far as the 45 call , you know that much of options value is given by time. Should the underlying stock rise close to option expiration but not reaching the strike, it may be your option price does not move much from where you bought it. My pleasure talking with you Good trading Paolo I agree on the fact that in this case bear spreads can be more versatile than covered calls (provided that the strike of the short call is >= to the put strike).
As far as the 45 call , you know that much of options value is given by time. Should the underlying stock rise close to option expiration but not reaching the strike, it may be your option price does not move much from where you bought it.
My pleasure talking with you
Good trading
Paolo

]]> By: Kurt Frankenberg http://blog.radioactivetrading.com/2009/10/why-ten-income-methods-part-2/#comment-4478 Kurt Frankenberg Thu, 04 Feb 2010 15:45:48 +0000 http://blog.radioactivetrading.com/?p=196#comment-4478 Hmmm... black hole, eh? "No" better than a covered call? Well, it might be good for you to fact-check a little, and to be more creative in your thinking as well... Here's why: I sold the August $40 call for $1.78, and picked up the August $45 call for only .28 cents. That makes a NET of $150 for the Bear Call SPread, rather than $178 for a "plan vanilla" covered call. Now, the MVL RadioActive Profit Machine (my name for this kind of married put trade) that I was doing the spread within was BULLETPROOF: the cost basis of both the stock and the put was lower than the strike price of the put, $40. The $40/$45 Bear Call Spread in this context is much, much more versatile than a covered call, and yet brings in nearly as much premium. Say that MVL goes up to $42.50... it DIDN'T but let's say that it does. Well, had I just sold a $40 call, that's all I can hope for in terms of premium. But with a Bear Call Spread, the price of the long $45 call has gone up. I might liquidate it for extra "kick" and get way more than .28 cents for it. If there's a certain amount of buzz going on, the $50s might even be worth something. I can sell THEM against the $45s... which I have in my account "free". Here's another possibility: MVL goes down a bit and recovers. When MVL is down, I might be able to close the short call for, say, .45 cents (remember I put on the spread for a $1.50 credit) and STILL have the long call in place in case of a recovery. This last management move is what I ACTUALLY did do. I closed the $40 call for .45 cents, locking in $1.05 of my original $1.50 credit... and was expecting a move back up. HAD the move up happened two weeks earlier, I would have "double dipped" the move: long on the stock AND long on the call. Fact is, DIS (Disney) announced its intention to buy MVL for $4.4 billion and the stock shot up to $50. SO let's recap: a plain vanilla call in that situation would have netted me $1.78 and it's over. My Bear Call Spread netted me almost as much and left the possibility for managing it three different ways... or NOT managing it... and MVL rocketing to $50 would STILL make me happy that I had done a Bear Call Spread instead of a plain vanilla covered call. "NO" better than a covered call? Black hole? Nah, I think it was worth the .28 cents to have all those "options". ;-) Happy Trading, Kurt Hmmm… black hole, eh? “No” better than a covered call?

Well, it might be good for you to fact-check a little, and to be more creative in your thinking as well… Here’s why:

I sold the August $40 call for $1.78, and picked up the August $45 call for only .28 cents. That makes a NET of $150 for the Bear Call SPread, rather than $178 for a “plan vanilla” covered call.

Now, the MVL RadioActive Profit Machine (my name for this kind of married put trade) that I was doing the spread within was BULLETPROOF: the cost basis of both the stock and the put was lower than the strike price of the put, $40. The $40/$45 Bear Call Spread in this context is much, much more versatile than a covered call, and yet brings in nearly as much premium.

Say that MVL goes up to $42.50… it DIDN’T but let’s say that it does. Well, had I just sold a $40 call, that’s all I can hope for in terms of premium. But with a Bear Call Spread, the price of the long $45 call has gone up. I might liquidate it for extra “kick” and get way more than .28 cents for it.

If there’s a certain amount of buzz going on, the $50s might even be worth something. I can sell THEM against the $45s… which I have in my account “free”.

Here’s another possibility: MVL goes down a bit and recovers. When MVL is down, I might be able to close the short call for, say, .45 cents (remember I put on the spread for a $1.50 credit) and STILL have the long call in place in case of a recovery.

This last management move is what I ACTUALLY did do. I closed the $40 call for .45 cents, locking in $1.05 of my original $1.50 credit… and was expecting a move back up.

HAD the move up happened two weeks earlier, I would have “double dipped” the move: long on the stock AND long on the call. Fact is, DIS (Disney) announced its intention to buy MVL for $4.4 billion and the stock shot up to $50.

SO let’s recap: a plain vanilla call in that situation would have netted me $1.78 and it’s over. My Bear Call Spread netted me almost as much and left the possibility for managing it three different ways… or NOT managing it… and MVL rocketing to $50 would STILL make me happy that I had done a Bear Call Spread instead of a plain vanilla covered call.

“NO” better than a covered call? Black hole? Nah, I think it was worth the .28 cents to have all those “options”.

;-)

Happy Trading,

Kurt

]]> By: Paolo Busi http://blog.radioactivetrading.com/2009/10/why-ten-income-methods-part-2/#comment-4477 Paolo Busi Thu, 04 Feb 2010 12:02:14 +0000 http://blog.radioactivetrading.com/?p=196#comment-4477 Hello Kurt, Keith is right when he points out that the call of the spread kicks in only above $45. The bear call spread, in these cases, is useful only if the underlying stock moves considerably. As a matter of fact you have a black hole between the two strikes 40 and 45. In that frame you are earning no money and the 45 call is not useful. Provided that at expiration of the call spread the underlying is above the short strike but not above the long one, your shares are called away at 40 and there you stop. In this sense, it's no better than a simple covered call. Moreover, you have also to consider that expiration of the spread is August, while you are covered by the put until january. If you are called away, you are left with the put and the not-so-remote possibility that after expiration of the spread the stock begins to rise. Hello Kurt,
Keith is right when he points out that the call of the spread kicks in only above $45.
The bear call spread, in these cases, is useful only if the underlying stock moves considerably. As a matter of fact you have a black hole between the two strikes 40 and 45. In that frame you are earning no money and the 45 call is not useful.
Provided that at expiration of the call spread the underlying is above the short strike but not above the long one, your shares are called away at 40 and there you stop. In this sense, it’s no better than a simple covered call. Moreover, you have also to consider that expiration of the spread is August, while you are covered by the put until january. If you are called away, you are left with the put and the not-so-remote possibility that after expiration of the spread the stock begins to rise.

]]> By: Kurt Frankenberg http://blog.radioactivetrading.com/2009/10/why-ten-income-methods-part-2/#comment-4466 Kurt Frankenberg Mon, 01 Feb 2010 17:52:18 +0000 http://blog.radioactivetrading.com/?p=196#comment-4466 Thanks for asking, Keith. Well, rumor had it that DIS was thinking of buying MVL. They actually DID make an announcement, later that month. MVL shares shot up toward $50. Had the announcement been made while I was short the $40 calls, but without making a .28 cent investment on the $45s... I woulda felt like a CHUMP. See, I get to keep the $1.78 premium for selling the $40s, I get to keep the $40 for selling the stock... and the put goes to zero. THIS is what happens if I'm short the $40s but NOT long the $45s. OTOH, with MVL at $50ish, all of the above would be true PLUS I would have a huge return on my teeny .28 cent investment. Get it? Income Method #6: Selling a Bear Call Spread introduces no problems, lets me play a credit spread with no risk, and generally kicks butt in the context of a sideways, down, OR up moving stock. Not bad, hm? K Thanks for asking, Keith.

Well, rumor had it that DIS was thinking of buying MVL.

They actually DID make an announcement, later that month. MVL shares shot up toward $50.

Had the announcement been made while I was short the $40 calls, but without making a .28 cent investment on the $45s… I woulda felt like a CHUMP.

See, I get to keep the $1.78 premium for selling the $40s, I get to keep the $40 for selling the stock… and the put goes to zero. THIS is what happens if I’m short the $40s but NOT long the $45s.

OTOH, with MVL at $50ish, all of the above would be true PLUS I would have a huge return on my teeny .28 cent investment.

Get it? Income Method #6: Selling a Bear Call Spread introduces no problems, lets me play a credit spread with no risk, and generally kicks butt in the context of a sideways, down, OR up moving stock.

Not bad, hm?

K

]]> By: Keith Henry http://blog.radioactivetrading.com/2009/10/why-ten-income-methods-part-2/#comment-4431 Keith Henry Tue, 26 Jan 2010 15:57:36 +0000 http://blog.radioactivetrading.com/?p=196#comment-4431 Kurt, thanks for blowing my mind! I am trying to understand the buying of the $45 Call as part of the Bear Call Spread. So let's say that you didn't close the $40 Call and got Called Out. In this worst case scenario I see these facts: 1) You have the right to sell 100 shares at $40 until JAN 10 (original Put) 2) You have the right to buy 100 shares at $45 until AUG 10 (from Bear Call Spread) 3) Upon being Called you had the following profit: $150 from selling the Covered Call AND $179 ($40 - $38.21 = $1.79) for a total of $329. $329 is 9.0% profit for your outlay of $3671 ($38.21 - $1.50 = $36.71 cost basis). Now, I am way A-OKAY with these gains,especially at no risk(!), but why even own the $45 Call? Is this Call just insurance in case the stock climbs $5+ more dollars after you were Called Out? (which it did!) If the stock stays between $40-$45 then no further gains would be realized as bought Call only "kicks in" above $45. If you had forgone buying the $45 Call you would have kept $28 bringing your gains to 9.7%, however they would have been limited to 9.7%. Am I missing anything? Please point out my errors. Again, thanks for reaching out with your discoveries! Keith Kurt, thanks for blowing my mind!

I am trying to understand the buying of the $45 Call as part of the Bear Call Spread.

So let’s say that you didn’t close the $40 Call and got Called Out. In this worst case scenario I see these facts:
1) You have the right to sell 100 shares at $40 until JAN 10 (original Put)
2) You have the right to buy 100 shares at $45 until AUG 10 (from Bear Call Spread)
3) Upon being Called you had the following profit: $150 from selling the Covered Call AND $179 ($40 - $38.21 = $1.79) for a total of $329.

$329 is 9.0% profit for your outlay of $3671 ($38.21 - $1.50 = $36.71 cost basis). Now, I am way A-OKAY with these gains,especially at no risk(!), but why even own the $45 Call? Is this Call just insurance in case the stock climbs $5+ more dollars after you were Called Out? (which it did!)

If the stock stays between $40-$45 then no further gains would be realized as bought Call only “kicks in” above $45.

If you had forgone buying the $45 Call you would have kept $28 bringing your gains to 9.7%, however they would have been limited to 9.7%.

Am I missing anything? Please point out my errors. Again, thanks for reaching out with your discoveries!

Keith

]]> By: kurt http://blog.radioactivetrading.com/2009/10/why-ten-income-methods-part-2/#comment-4422 kurt Wed, 13 Jan 2010 16:04:53 +0000 http://blog.radioactivetrading.com/?p=196#comment-4422 Actually, along the way I closed the $40 call for .45 cents when MVL dipped, but I held onto the stock + put position. If I had NOT closed the short $40 call, I could still have bought the stock BACK at $45, because of owning the $45 call, right? SO if MVL ran up while I was still holding the bear call spread, there would still be an unlimited upside. I own stock and ALSO own the privilege to buy it at a locked in price. Hope that explains things, Paolo! If not, write again. K Actually, along the way I closed the $40 call for .45 cents when MVL dipped, but I held onto the stock + put position.

If I had NOT closed the short $40 call, I could still have bought the stock BACK at $45, because of owning the $45 call, right? SO if MVL ran up while I was still holding the bear call spread, there would still be an unlimited upside. I own stock and ALSO own the privilege to buy it at a locked in price.

Hope that explains things, Paolo! If not, write again.

K

]]> By: Paolo Busi http://blog.radioactivetrading.com/2009/10/why-ten-income-methods-part-2/#comment-4421 Paolo Busi Wed, 13 Jan 2010 15:25:34 +0000 http://blog.radioactivetrading.com/?p=196#comment-4421 Hi Kurt, maybe I've missed something because english is not my mother tongue..but how can you sell your shares at usd 48.41 when you are short of 1 call strike 40? Aren't you forced to deliver the shares, regardless of the other call strike 45? Hi Kurt,
maybe I’ve missed something because english is not my mother tongue..but how can you sell your shares at usd 48.41 when you are short of 1 call strike 40? Aren’t you forced to deliver the shares, regardless of the other call strike 45?

]]> By: Kurt Frankenberg http://blog.radioactivetrading.com/2009/10/why-ten-income-methods-part-2/#comment-4324 Kurt Frankenberg Tue, 24 Nov 2009 21:22:24 +0000 http://blog.radioactivetrading.com/?p=196#comment-4324 Hi Michel, The way I defeat this is to buy the stock and put first, then wait and sell calls or make other adjustments later. Hi Michel,

The way I defeat this is to buy the stock and put first, then wait and sell calls or make other adjustments later.

]]> By: Michel Braud http://blog.radioactivetrading.com/2009/10/why-ten-income-methods-part-2/#comment-4285 Michel Braud Tue, 17 Nov 2009 22:09:42 +0000 http://blog.radioactivetrading.com/?p=196#comment-4285 May be I missed it but you didn't mention "liquidity". just too bad when there is no counterpart. Your example is nice because you had the stock before and the quote did rise before you get to buy the options, so their prices were probably very different giving you an edge. As for me, and that where the difficulty stands, it is very difficult to pick one stock AND simultaneously the options at a good price, they are always calculated to your disadvantage. Example: I bought a stock at 15.65 and sold a call17 for 1.65 Now if I want to buy a protective put17 it cost 2.95 at best ! Then the other call at 18 cost 1.45 I am still thinking how could this be profitable ! I will appreciate your take on that. May be I missed it but you didn’t mention “liquidity”. just too bad when there is no counterpart.
Your example is nice because you had the stock before and the quote did rise before you get to buy the options, so their prices were probably very different giving you an edge.
As for me, and that where the difficulty stands, it is very difficult to pick one stock AND simultaneously the options at a good price, they are always calculated to your disadvantage.
Example:
I bought a stock at 15.65 and sold a call17 for 1.65
Now if I want to buy a protective put17 it cost 2.95 at best !
Then the other call at 18 cost 1.45
I am still thinking how could this be profitable !

I will appreciate your take on that.

]]> By: Kurt Frankenberg http://blog.radioactivetrading.com/2009/10/why-ten-income-methods-part-2/#comment-4257 Kurt Frankenberg Tue, 03 Nov 2009 06:42:35 +0000 http://blog.radioactivetrading.com/?p=196#comment-4257 You know? I always like to say that it's not so much about picking stocks, but picking STOPS... setting up your money management. Also, good trading is less about timing your trades, but trading TIME... responding to a changing market and locking in a position's strength and security (bulletproofing) and/or catching the movement of a stock for further gain. If those two components are handled, most any stock that fits your criteria will do. How to choose after that? Can't help you my friend... I'm wrong most of the time. Yes, I am UP after the worst bear market in recent decades, but it certainly hasn't been because of my picks; my record shows I only have 46% winners. On the other hand my average losing trade loses 4.7% and my average winning trade wins 9.2%. Narrow the choices? Dude, throw a dart at a board. More regret comes from indecision than bad decisions. Thing is, with a proper money management plan in place, even bad decisions don't hurt that bad, and blind luck can make you money if you lose small and have a few big wins. I can afford to be wrong more often than right. So can you. I would say, stop worrying about everything being just right before pulling the trigger... to coin a phrase, JUST DO IT. That is, AFTER you have weighed your money management picture properly (your criteria of 5% max loss is great) and balance that max loss with your total portfolio picture so that only 1% of your total capital is AT RISK in any one trade. Thank you for the kudos, Gary. Happy Trading! You know? I always like to say that it’s not so much about picking stocks, but picking STOPS… setting up your money management.

Also, good trading is less about timing your trades, but trading TIME… responding to a changing market and locking in a position’s strength and security (bulletproofing) and/or catching the movement of a stock for further gain.

If those two components are handled, most any stock that fits your criteria will do.

How to choose after that? Can’t help you my friend… I’m wrong most of the time. Yes, I am UP after the worst bear market in recent decades, but it certainly hasn’t been because of my picks; my record shows I only have 46% winners. On the other hand my average losing trade loses 4.7% and my average winning trade wins 9.2%.

Narrow the choices? Dude, throw a dart at a board. More regret comes from indecision than bad decisions. Thing is, with a proper money management plan in place, even bad decisions don’t hurt that bad, and blind luck can make you money if you lose small and have a few big wins.

I can afford to be wrong more often than right. So can you. I would say, stop worrying about everything being just right before pulling the trigger… to coin a phrase, JUST DO IT.

That is, AFTER you have weighed your money management picture properly (your criteria of 5% max loss is great) and balance that max loss with your total portfolio picture so that only 1% of your total capital is AT RISK in any one trade.

Thank you for the kudos, Gary. Happy Trading!

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