Why So Many People LEAVE the Covered Call Strategy… and What They are Doing INSTEAD

Today, you get to look over my shoulder and read my mail… and see one of the BIGGEST reasons why the covered call selling crowd is DEFECTING… we’re talking about a mass exodus… and learning how to trade a much safer, much better options trading strategy.

Cari Houston (C.H.), a covered call seller, called me up and asked me to give her proof that she should trade married puts instead of covered calls. She also wanted me to critique of her two covered call trades and show her how she might have done better.

Seems that C.H. made a “good” return on one trade, and lost the milk money on another… and I shared with her the FACT that she would have done much, MUCH better in this market with both of those trades had she only gotten my book a few days before.

Before I let you in on the details of my conversation with my newest convert, let me ask you which of the following you would pick, if you were given the choice. Would it be an investment with…

limited upside win potential/high downside risk

OR

UN-limited upside win potential/ limited downside risk.

GEE… when we put it that way, the choice seems clear, right? Yet intelligent, mostly college-educated people will spend thousands of dollars for a weekend seminar… that teaches how to do the WRONG choice from the short list above.

It amazes me that folks would voluntarily choose a strategy that limits their profits while leaving the door open for big problems… like covered call selling does…

…instead of limiting potential losses and leaving the upside open, like the RadioActive Trading strategy does. Sigh.

Well, I’m trying to change that. Every once in a while I get a ring from someone that’s had an opportunity to sit in on one of our twice-weekly free Webinars. I spoke with a covered call seller, C.H., on Friday, November 13th. This call will turn out very lucky for her because she “gets” what we spoke about!

C.H. understood the chief benefits of the married put position as set forth in the Webinar, but she had two PRACTICAL examples from her personal account that she wanted some perspective on.

C.H. asked me if I could prove to her that it would have been better to trade a married put on her stock picks rather than a covered call. I asked her to send me her two biggest frustrations… she had been complaining about losing too much on bad trades, and gaining too little on good trades.

After listening for just a few minutes, and WITHOUT even looking up the stock symbols… I was able to tell her I could almost GUARANTEE that her experience would have been better if she had just traded both issues RadioActively.

In this first blog post, I’m going to share the first part of C.H.’s letter:

Dear Kurt, it was nice talking to you this afternoon.

Here are two trades that we discussed in our conversation:

1) CTRP 11/04/09, stock price was $57.88, STO November $60 strike at $2.30. 300 shares.

After earning report it shoot up to $73.00 range. So I have made 7.9% in about two weeks. But you are saying that i could have done better…

Okay. Let’s stop there. I did tell C.H. that both of her trades would probably have done better if she had set them up RadioActively. Then she sent me the facts.

One of C.H.’s picks went up and she made money… but not as much as she could have. On the other hand, one of her picks went down and she LOST big time. In either case, setting the trade up RadioActively would have helped her do better.

First, let’s compare the result from her WINNING covered call trade with the identical stock purchase using the RadioActive Trading method.

By the way… This is where I get the most flak from my critics. They say that buying a put LIMITS profits so much that a GOOD trader wouldn’t do it.

Well… okay. That’s what some misinformed PEOPLE might say. Let’s find out what the NUMBERS say, and you can be the judge about which strategy is better. Let’s look at the contents of the first part of C.H.’s letter mathematically.

On 11/13, with shares trading now in the $70s, C.H. couldn’t “roll” the short calls to catch more upside. So, she will likely be accepting assignment on CTRP this Friday, November 20. She’ll have to hold the stock until then, but here it what the picture is likely to be:

I expressed this profitable trade four different ways: per share, total dollar amount profit, profit as a percent, and percent “annualized” return– because that’s the way a lot of these covered call options trading gurus show it.

By the way, I think the “annualized” percent thing is a dishonest way to inflate projected returns… This figure is calculated by taking the percent profit, multiplying by 365, and dividing by the number of days in the position.

Since in this case C.H.’s CTRP covered call trade was on for 16 days, the 7.9% profit can be expressed as 181% “annualized”.

Again, I don’t think this is the most honest way to express returns. However, since the covered call guys like to show it like that… we’ll also express the married put result the same way. Just this once 😉

SO, C.H. is looking at a 181% “annualized” return from doing covered calls on a volatile stock that she’s bullish about. Of course, let’s not forget that we’re assuming that over the next week, CTRP won’t experience a sudden DROP and turn into a LOSS. Because she has sold a covered call, C.H. is OBLIGATED to hold onto the stock for another week… and bear the risk that goes with owning volatile stock. So cross your fingers for her, she ain’t out of the woods yet.

Okay. Back to the comparison. C.H.’s big complaint about her winning covered call trade is that she can’t take part in CTRP’s upward spike past $60.

Let’s look at how we would have set up CTRP, had we followed the guidelines of The Blueprint and kept the risk down to single digits percents for several months:

CTRP has gone up pretty high. This is how C.H. COULD have ended the position today (11/13/09) had she set it up RadioActively in the first place:

Now, ANY way you slice it the above trade would have been better than buying stock and selling a covered call.

Instead of buying stock and selling a call, if C.H. had bought stock and also an in-the-money put, seven months out… she would have done MUCH better: $3.89 better per share; $1,167 better as a dollar amount; 3.7% better as an ACTUAL percent, and 289% better as one of those “annualized” returns.

That big, big difference at the end is because the position would be in place for a shorter period of time…11.6% return in nine days waaaay beats 7.9% in 16 days. Even if we simply ended the position on 11/13, without using the “Income Methods”… we still can plainly see the superiority of the married put play.

Okay, gang. In this FIRST installment, I showed how married puts outperform covered calls on the winning side. But PROTECTION is more important. When you’ve picked a loser, keeping losses down makes all the difference to your overall portfolio. Check that out in our next blog article on “Why So Many People LEAVE the Covered Call Strategy… and What They are Doing INSTEAD”.