What Do Seasoned Options Traders Think of RadioActive Trading?
In this post, comments and wisdom I got from an experienced options trader about married puts, risk management, and trading in general.
Hi gang! I recently got off the phone with a local (MY state) options trading enthusiast. All over the Denver and Colorado Springs areas there are groups that offer support to users of VectorVest, OptionVue, and other firms dedicated to teaching the public about trading options, then selling them the tools to do it. (I personally prefer a cheaper and better alternative at http://www.poweropt.com/RAT/ )
Anyway, some of these local groups look for guest speakers at their events. When a friend of a friend suggested that I talk with a local, veteran options trader… Dennis… I left a message on his phone a couple of weeks ago, then forgot about it.
Dennis is a busy man, like most successful people are. So I didn’t expect a return call any time soon, if ever. But he did follow up. Yesterday Dennis gave me a ring to check out what I might say to his group in case he did invite me to come. In response, I invited him to check out my twice-weekly webinar, The RadioActive Trading Methodology.
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If you’ve never been, here’s a summary: Twice a week I teach (for free) the RadioActive Profit Machine… a very specific arrangement of stock plus a far-out-in-time, in-the-money put option… as well as one or two of a number TEN “Income Methods”. The IMs are my name for adjustments to a married put trade. These adjustments mostly spread trades, nested WITHIN the framework of the married put. These adjustments are designed for taking money out of a married put (without selling the stock) or lowering risk, or both.
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After watching the webinar Dennis was quite impressed. He said, “WHERE IN HECK WERE YOU LAST WEEK??”
During the webinar, I had shown a comparison between covered calls and married puts, as well as one of the several ways to take money out of a “bulletproof” stock without putting a limit on the upside. Coincidentally, Dennis had just that same week been let down, in BOTH of the ways that a covered call trade can let you down.
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Dennis had been trading covered calls on two BioTechnology firms. He got hammered by one when it gapped down… and to add insult to injury… he didn’t realize anywhere near the gains he might have when the other stock he was playing went waaaaaaay up.
That biotechnology, by the way, was ITMN… up about 140% since this time (March 11, 2010) last week. Dennis had sold an in the money covered call. Awww, man. Yes, Dennis DID make a little bit of bank when he got assigned… but not nearly what might have been, had he only put on a married put instead of a covered call. On the other hand, one of RadioActive Trading’s clients (”Bill”) was long 1000 shares of ITMN with ten puts for protection, keeping his risk manageable and small while playing for big gains…
Hmmm. Who do you think was happier after ITMN blew up? The guy with short calls against… or the fella that went in to the FDA approval announcement having a great night’s sleep with a tiny amount AT RISK, and blue skies for the stock’s meteoric climb? Give ya three guesses and the first two don’t count, my Dad used to say.
Being an experienced spread trader, Dennis could see the benefits of RadioActive Trading immediately during the webinar. He really did mean it when he said he should have seen my presentation a week before. Well, Dennis is now purty excited to have me come and talk to the local options trading group. That’s something I really enjoy doing on a limited basis, and I’m happy to share. It seems every time I do, I get to rub shoulders with guys smarter than me and I get to learn a thing or two as well. I know I’ll learn a thing or two from Dennis!
I’m looking forward to this upcoming speaking engagement with seasoned investors as well as newbies. Dennis and I had some good laughs on the phone about how some folks take an Optionetics class, or go to a weekend Rich Dad seminar… and come out on the other end with $5K in capital to trade and ready to quit their day job.
Hmm. Not gonna happen, folks. But what you can do, right now… is learn to develop a positive expectancy system for your trading, stick to a set of rules… and above ALL, use options to MANAGE your RISK in a trade.
Dennis is no slouch at trading. He regaled me with the story of how he turned a stake of $300K into $1.6 MILLION in just about a YEAR…
…but also, how he ended up LOSING $1.1 million of that in a matter of a few DAYS.
I was thinking to myself, “Well… still. That’s $300K to $500K in about a year. Still pretty good.” But Dennis pointed out to me that he had been so highly leveraged that he was lucky to get out with a net gain in that time. He jokingly… or perhaps not so jokingly… told me that he was just a step from sleeping under a bridge at one time. The margin that Dennis was using exposed him to losses around $4 million, had things gone further south. Good thing that this little adventure of his happened years ago instead of during October/November 2008, eh? 
Yes, big risks can make for big gains. But they can also allow for some spectacularly crushing LOSSES. Dennis is one of the few that grasp this and had the nerve and the smarts to stay in the game, but with more conservative trading. As the saying goes, “There are bold traders and old traders. But there are NO old, bold traders.”
After this, Dennis and I talked about how most options trading education out there is simply about the mechanics of a play, and almost NONE of it is about the things that really matter. We talked about expectancy, psychology, position sizing, a written trading plan… the really important components of a complete system.
After taking a look at the real trades I’ve done with the RadioActive Trading Methodology… but more importantly, the PRINCIPLES that it’s based on… Dennis told me that using a married put is one of the smartest things you can do because it predefines your risk, yet leaves your upside open… and then you can do trades nested within the already protected trade. Like the RISK-LESS bear call spread that I demonstrated in that particular session.
A half hour after beginning my follow-up phone call with Dennis, I hung up the phone… simultaneously humbled and encouraged. When a man that rolls $300K into $1.6 million tells you that the way that YOU’RE trading is pure gold… that’s something. Now, I still have quite a ways to go because I’m constantly working on my systems and on myself to become the best trader that I can be. I know that when I meet with Dennis and his group, I’ll have a bunch of questions about market psychology and other things that I need a better grasp of.
Dennis has said that he will be “an open book” and share anything that he can with me, as he does for the members of his little options trading group in Colorado Springs. Since he’s achieved an honorable level of success as a trader, I’m going to definitely take advantage of that offer. I hope to have the caliber of character and accomplishment that Dennis has had during his career. In the meantime, I am happy and humbled to have something to offer in return.
March 12th, 2010 at 5:21 pm
Kurt,
I love your system and I do own the “Blueprint”. I have heard you say that you are not in favor of using margin. My question is this, what is wrong with buying a the stock portion of the ”Married Put” with your cash and using your margin for the put?
March 12th, 2010 at 7:18 pm
Kurt
can you do the same with Long call options instead of stock?
March 12th, 2010 at 7:19 pm
Hi Kurt,
I’m a long time owner of The Blueprint (from Boston) and love you methods. The only problem I have with them is that they are very capital intensive and my account is not too large. If my account were large enough to trade with Portfolio Margin rules, it would be VERY hard to beat your methodology.
March 13th, 2010 at 2:25 pm
Demetrius,
Coincidentally I have used margin in the way that you are suggesting. My very first RadioActive Trade ever consisted of AMZN at $16.09 (it was October 2002) and a January 2005 $20 put option at $8.90. I had exactly $2500 to trade with and expenses of $24.99 times a hundred = $2499. I had to use margin to pay the commissions!
The thing is, you do add a little to your risk whenever you borrow. Also, there IS interest. But if all that you borrow is enough to handle paying for your insurance, AND that total amount that is AT RISK still equals single digit percents, it’s okay. Just make sure you aren’t borrowing to buy stock or you will certainly run into trouble, sooner or later.
Thanks for the Q, D!
Happy Trading,
Kurt
March 15th, 2010 at 1:12 pm
Looks like my blog host is getting these fellers out of order! Keith, Ben, let me reply to you now.
Keith:
In a word, NO. You CAN accomplish a similar risk/reward curve but you can’t do all the same things with a long call. I’ve written a number of treatises and published videos on this subject. Poke around on this site and you’re bound to find them!
Ben: Hey Ben! I remember you from the MIT seminar, in which I handled the above subject… that a long call by itself is NOT equivalent to a married put.
I’ll give you the same answer I give everyone that presents the objection that they don’t have enough capital: FIX THAT.
Thing is, once you have a positive expectancy system and are certain that given a long enough time horizon, your positive expectancy system WILL grow your capital… then now it’s time to find the capital.
Ben, do you remember my racecar example? I use this little math riddle to illustrate that math doesn’t always behave the way that we expect it to:
A racecar goes around a one mile race track once in 60 seconds. Average speed? Must be 60 mph, right? Because 60 mph is a mile a minute.
Okay, so here’s the riddle. Two laps for the car this time… it goes around the track once at 30 mph. How fast must it go on the second lap in order to make the average speed for BOTH laps 60 mph? Careful…
Chances are that most folks reading this blog thought 90 mph. And most folks would be WRONG.
Others would scratch their head and say, “No, it’s probably more like 120 or 150 mph because of the time it would take to accelerate the car. It wouldn’t go INSTANTLY to 90 mph so maybe you have to go faster than that 90 to make it work out.”
That sounds like a smarter answer but those guys would be wrong too.
Here’s the surprising truth: It’s a trick question. There’s NO WAY that the car could go fast enough to make the average speed for both laps 60 mph. Here’s why:
In order to make the average speed 60 mph, the racecar has to go around the one mile track twice in two minutes, right? Two miles, two minutes… 60 mph.
But since this racecar dilly-dallied and did the first lap at 30 mph, it has USED those two minutes. There is no time left… no hope that the racecar can ever make that second lap and thereby make the average speed for both laps 60. No can do.
SO as interesting as this little exercise in math might be… WHAT does that have to do with the price of tea in China? Why am I using this in the context of your comment about capital?
Well, my friend… you are (fortunately) still on the first lap. You haven’t yet used up all the time available to accomplish your goals.
Since you own The Blueprint and are familiar with the ideas of limiting risk while leaving your upside open… and KNOW that given a long enough timeframe, a positive expectancy system will pay out for you, as long as you have enough capital to stay afloat during the inevitable drawdowns….
…then why not make up your mind to put away more of that capital?
In the meantime of course you may paper trade to sharpen your skills, but I’m telling you this for your own good: if not now, when? I would make a commitment to setting aside a small portion every week or month from your salary, or starting a side business to raise a little extra cash to trade.
This is the polar opposite of what most options trading educators will sell you, I mean tell you. Most options trading education firms want you to believe that if you take this high-priced course or that one, or… oooh… the Master Double Gold Platinum Members Only course… why then, you’d be able to quit your job and trade for a living.
They want you to believe that you can make enough money trading to live on and quit working.
I want you to work so you have enough money to trade for profits and not quit living!
Listen, if you have a trading method that works it’s not the time to quit saving for retirement. It’s time to kick it into high gear and put away as much as you can and GROW it using a technique that doesn’t require your babysitting your account six and a half hours every day.
SO… long story short. If you don’t have enough capital to trade RadioActively, there’s a sure sign that you need to. So put it together! I believe in you, Ben.
Happy Trading,
Kurt
March 15th, 2010 at 5:00 pm
I have 200K in my account to start your trading method. How many positions is optimal in my portfolio. There may not be an actual answer but a ball park figure would be ok
March 16th, 2010 at 5:38 am
Hey Kurt,
I’m sure I speak for many others (maybe not your competitors) when I say “I appreciate the effort you’ve put in to The Blueprint and other works that you’ve done and continue to do.”
There’s something that bugs me though;
While setting up a stock and put position in the way you describe absolutely limits the downside to a known amount from the outset, doesn’t it also put you in the situation whereby you’re sitting at that guaranteed max loss from day 1?
What I mean is, although there’s an almost impenetrable floor on the downside, your position starts from the floor and you have to hope or work it back up to breakeven before you can then start to hope for a return?
How’s this for an analogy; Imagine a swimming pool. The level of the water is the stock price, gently rippling away, up and down. You could buy the stock and you would become a little boat bobbing up and down on the water, if someone starts the wave machine you could ride a big wave up, if you hit it wrong you could take on water and need to bail, at this point the swimming pool has no bottom. You buy a put which in this example would be a rope that tied your boat to the side of the pool, it has a certain length so you know if you get in trouble you will only go down so far, regardless of how deep the water is, the price for this safety rope is that you take on some water so your boat sits lower in the water. The rope will only be there for a certain time. Can you bail out the water before the rope disappears? Will you be able to ride a big wave before the rope disappears and take your boat out at the crest?
This isn’t necessarily all bad, accounts could survive a lot longer if they used this method, but I think people should also be aware of the importance of being able to evaluate a stock to pick prior to entering into a stock+put set-up. I don’t think just because a RPM with single digit risk is found using the Power Option tools that it’s necessarily a good move. Could evaluating a stock and chart analysis also form parts of a future Blueprint?
Larry
March 16th, 2010 at 8:58 am
It’s up to you but MY limit to how many positions I can hold is: Can I remember them all without looking them up?
For me that’s about seven or eight different stocks, each of which I’ve “legged” into. I may not “put” all of my RPMs (RadioActive Profit Machines) into operation at the same time.
Now, one layer of protection is the put option. Another layer is that depending on my level of aggression, I will only expose .5% - 2% of my account in any one stock.
Say you only want to expose 1% of your account in each position. You find a $50ish stock with 5% AT RISK in that particular trade. The DOLLAR amount for risking 5% in a $50 trade is $2.50, or $250 per hundred shares, right? Since your account is $200K you would take a position with 800 shares.
800 X $2.50 = $2,000 which is 1% of your total $200K to trade. Ta-da…
Now you only have $2,000 AT RISK in that particular trade, right? Right. But it takes about $40K of your capital to assemble that RPM so you have $160K left.
One of the coolest things about trading RadioActively is that your position sizing gets figured out FOR you. In this same account you might have 100 shares of GOOG, 400 shares of GMCR, 3500 shares of GE but be risking the same dollar amount with each.
Harvey, I think you’re off to a great start. 80% of all traders don’t even give this stuff (position sizing and asset allocation) a thought… they just start putting on trades and hoping for the best. You, on the other hand, are looking to diversify and give yourself the best chance of success. I expect to be hearing more from you soon, and more success stories than war stories!
Happy Trading,
Kurt
March 16th, 2010 at 12:19 pm
Kurt,
I’ve been poking around your site and watching your videos on youtube. The idea to use a married put to protect from a plunge isn’t new but I believe that very few people ever give it a thought. I knew that such a setup was possible but I have never used it. I think that the main problem is that when you place such a trade you don’t fully benifit from the price appreciation of your stock if it goes up. People focus on this and forget that their loss is limited with a put. It’s purely psychologic.
I have not read your blueprint because I object to its price and I’m not a newbie either and so I can figure out a few of your so-called income methods.
I don’t know if you’ve ever touched on the subject but I’ve never seen you talk or write about acquiring stocks with selling puts. For example, instead of purchasing 1000 shares of stocks and buying 10 long term ITM puts, I would advocate buying the protective puts right away but at the same time selling 10 cash-secured put for the nearest expiration month right at the money. The time value is at its highest and this way, the amount at risk on the downside is even less than if you had bought the stock right away. The following month depending where the stock is at exp, you might be able to roll down and out for a credit or be assigned if the price went down, roll out at the same strike for a credit if the stock stayed even and this way you continue eating away at your amount at risk; or you let you put expired worthless if the stock went up and you roll up and out for another credit. With this setup, the most at risk is if the stock really goes up violently because you can participate to the upside; the way to remedy this is to purchase the same amount of OTM calls as you sell ATM puts. They both expire in the same month and if the price goes up, then your calls gain in value and you fully participate to the upside. You may then choose to exercise your calls and then continue to extract income from them with your different income methods.
Another thing that i’ve learned is that there’s no rule that stipulates that you should sell as many calls as every 100 shares of stock that you own. Selling a call for every 300-400 shares is better because it brings some income and leaves the upside open to roll out and up if necessary.
Frederic
March 16th, 2010 at 4:37 pm
Ben, I am looking for some more support for my options ideas. You might be just the site to help me out. It is tough doing options trading without someone with experience to bounce off ideas. I have lost big on several occasions being undisciplined and unprotected (like October 2008).
I am now using a strategy I have developed that is fairly conservative yet productive, I think, but maybe not optimal. I have sold out of all my stock positions and replaced with Call Spreads on my favorite stocks. Most are fairly large cap because small caps do not trade well in the options markets. I buy well into the money by about 20-25% (ITM for short) which eliminates almost all the time premium for 3-4 months out options. I then sell an OTM call in the same month with about a 5-7% premium, usually 2-3 strikes above the current price.
This gives me a situation where my risk is defined (cost of the option less the call premium). Although my upside oppty is limited, it is levered by the long call option. So, if the sold call strike is 10% above the current price, I have the potential to make 40-50% return if held to expiration. This should be a good return if repeated 2-3 times per year. But I also have developed a discipline to close the trade once the current price hits the strike (or gets close). After this point, the sold call losses offset most of the long call gains.
If I close out, I can also just roll the spread up and out on the calendar if I continue to like the story. To limit my risk further, i only employ this strategy with up to 40% of my total portfolio and I have started buying a large SP500 index put position that covers 40% of my total exposure (including the levered amount of the options, net of the short calls).
But now after attending your seminar I am thinking I should mix in some of the married puts, but married to long ITM calls instead of stock. What do you think?
March 16th, 2010 at 4:47 pm
BTW…after reading about Dennis above, I am not shy to say it was naked short puts that almost did me in in October 2008. I had them in a margin account and I had to shovel money into that account to stay alive. I also started using puts and selling short put ETFs (like SDS, SKF and DUG) to cover my losing long positions. It was a real wake up call and after having lost 60% of my lifetime portfolio, I decided to play it smarter, though still aggressive on the way back. I did claw my way back to 30% down by Jan 1 this year, which is about the same as the overall market.
I could have accomplished the same result by putting my entire porfolio in SPY in July 2007 and taking a 3 year nap. oh well, live and learn. Now I am ready to pull ahead of my July 2007 peak portfolio value using better techniques and discipline.
Brian
March 17th, 2010 at 8:48 am
Okay, you guys are writing in too fast
Let me reply to…
Larry:
No, Larry, the bailing out water analogy doesn’t work. Let me give you another, similar analogy… that ALSO doesn’t work… that of driving a car off the parking lot at a car dealership. It immediately loses 20% of its value.
WRONG! (not the car, but the stock plus put)
Most folks are under the misconception that buying a stock and a put together causes a sudden loss in value like what you’re describing. It doesn’t.
Here’s a real-life example: You like a stock that’s trading at, say, $36.38 X $36.40, and at the same time a Oct 2010 $40 put trading at $5.40 X $5.60. That’s the price on Big Lots (BIG), which I happen to be long on.
To make this BIG purchase, right now, you’ll pay $36.40 for the stock and $5.60 for the put (unless you put in a limit order and get filled “in the spread” for an even better price. That’s $42 for an investment GUARANTEED to be worth $40 all the way to October 2010.
The next INSTANT, say you decide that you just made a mistake. This stock looks good but another looks a whole lot better. Plus that Kurt guy is ugly and his mother dresses him funny… why oh why did I try and copy his BIG trade?
So you sell off your BIG position. Hmm… you don’t lose the $2 AT RISK amount you originally signed up for. No, if BIG is trading at $36.38 X $36.40 as I said… you get $36.38 for it. Lost two cents. If Oct 2010 $40 puts are trading at $5.40 X $5.60, you get $5.40. Lost twenty cents there, LESS if you got filled “in the spread” as I mentioned before.
That’s .22 cents loss, NOT the $2.00 that you and so many others believe that you start out “under water”.
So in your example with the swimming pool, and with others that talk about the car dealership, it doesn’t fly. The only reason I might have the full loss of $2 immediately after the purchase like that is a news event that takes the stock down HARD… in which case I’ll be REALLY glad that I bought the put. Otherwise I’m fully exposed to the stock’s crash, instead of protected at that $2 AT RISK level.
Got it? Now, as time goes by and the stock fluctuates up, down, or goes sideways there will be a gradual approach to that $2 maximum loss… but that $2 loss if offset by a move of about five percent in the stock. THAT I can believe.
So if the stock goes up, the net value of the put plus stock goes up. If the stock goes down, my maximum AT RISK amount is already locked in. I can elect to do one or more “Income Methods”… TEN different ways that I’ve developed for adjusting the original married put position… to change the picture and reduce risk, take income, or BOTH… while staying protected much, much better than any stop order could possibly do for me.
Ahh… it’s so refreshing to have an unlimited upside while having no worries about sudden reversals. The peace of mind is WORTH the amount I “put” into the protection.
March 17th, 2010 at 9:37 am
Frederic!
Sorry that you object to the price of The Blueprint. I have a very impressive satisfaction record, though, from experienced options traders. Many have called or written that they have traded options for years… more than one on the Chicago floor… and said that The Blueprint has changed their outlook on options trading and position sizing for life.
Doesn’t get much better than that.
To address your point about selling puts to acquire stock… uh, it IS in the book. The reason you never have seen me write about it is that I have reserved that and countless other details FOR the book. But since you bring it up and it’s no great secret, yes, you can sell puts against puts with the intent to have stock assigned to you.
My friend Ernie Zerenner (founder of PowerOptions… http://www.poweropt.com/rat if you would like two free weeks of the best options searches for 23 strategies) was selling puts naked, with the intent of getting assigned. He would THEN pick up a long put to protect the shares.
I pointed out that this would expose him to risk at least for a time, and then gave him the entry technique you described. “You could buy puts far out in time and sell near term puts with the intent of getting assigned. The net result of this would be that IF you get assigned, you will have an RPM (RadioActive Profit Machine) in place with long stock for which you received a premium up front, plus a long term put for protection.
However..! As I pointed out to Ernie, and now am pointing out to you: This entry technique is NOT a limited risk, unlimited upside play… it is a time spread with the POTENTIAL for turning into a protected trade with unlimited upside.
Take MVL for example. I bought Jan 2010 $40 put to protect my MVL stock on June 22. On August 31, Disney (DIS) announced its intent to buy MVL for $4.4 billion.
My shares went from the mid-thirties to almost fifty overnight. My Jan 2010 $40 put went from $6.50 to .30. But that’s okay… because I OWNED the STOCK at a cost basis of $31.71, plus did Income Methods to reduce even that cost.
I made thousands on MVL. But if I had bought a $40 put option and sold near term $40s or $45s against with the intent of being assigned… Well, I would be able to keep the near term premium on those puts, yes. But I’d have been KILLED by MVL’s sudden updraft on the long puts.
Nothing wrong with your time spread idea, so long as you’re right. ON the other hand, rather than managing one option against the other, I was just long stock.
NOW… I did read your example of buying calls as well as selling near term puts. Wow, NOW we’re getting fancy!
Selling near term puts and buying near term calls at the same time is the synthetic equivalent as buying stock. My point is, why not just buy the stock? This FORCES me to have an optimum position size in my married put position, whereas using the synthetic equivalents does not.
You can check out my other writings on that elsewhere. But it’s just common sense: the Black-Scholes equation ASSUMES that you have the capital to trade long stock but DON’T… you buy a call with a little of that capital and deposit the rest in an interest bearing account instead. That’s parity.
If we simply buy a call, or sell a put and buy a call, we are leveraging ourselves. When use we leverage, we can do a lot more than without… we can reap a lot of profits OR we can get into a lot more trouble!
Best wishes to you, Frederic. I’m sure you are savvy enough to figure out at least a few of my so-called Income Methods. I’ll just caution you to watch your position sizing, especially with the panic buying that seems to be brewing now.
Happy Trading,
Kurt
March 17th, 2010 at 1:07 pm
Kurt,
My example of buying a long-term put ITM and selling a short-term put ATM against it, while buying a short-term slightly OTM call came to me while I was watching my risk-reward graph on the thinkorswim platform. I realized that I was exposed on the upside and SINCE my intention is to get the stock, the only way to get stock through the trading of options is to either sell puts and be assigned or buy calls and exercise them. In this case, I was covered with my put spread on the downside or if the stock didn’t move; but in the event of a sudden increase, I would have lost big unless I had some calls in place in order to get the stock on the upside.
Again, my intention is to obtain shares and not to synthesize a position through the clever use of options while over-leveraging myself in the process. We are on the same boat.
I am only trying to start lowering my cost basis even before acquiring a single share. Selling near term puts and buying near term calls at the same time is ONLY the synthetic equivalent of long stock if the strikes are the same, which in my case isn’t necessarily true. Let’s look at your Marvel example from this perspective:
Let’s say the stock is at $35.84 on June 22nd 09. The Jan10@40Put is $6.35. 35.84 + 6.35 = 42.19. I have $15,000 for this trade, so I decide that my position should be 300 shares (15000/42.19=355). I could go ahead with this trade and buy 300 shares @ 35.84 and my married put right away. There’s nothing wrong with this. Or like I explained above, I could go ahead and get 3x Jan10@40Put for 6.35 and sell 3x Jul09@35Put for 0.85. I would also buy 3x Jul09@40Call for 0.15. -[6.35 - 0.85 + 0.15 = 5.65] x 300 = -1695 (-11.25 commission) = -1706.25 (debit). I don’t touch the rest of my reserved $15,000 until my shares are acquired.
At July expiration, 7/17, MVL closes at 39.35. So the next Monday, I sell 3x Aug09@40Put for 2.05 and buy 3x Aug09@45C for 0.20 (the $40 calls are too expensive so i take a risk and choose the $45). I receive [2.05 - 0.20 = 1.85] x 300 = 555 (-7.5 comm) = 547.50 (credit)
At August expiration, 8/21, MVL closes at $38.45. My short puts are ITM. I could let them be put to me, which I most likely would have done in real life. But for the sake of demonstration and argument, let’s say that I rolled them out to September:
I buy back 3x Aug09@40Put for 1.55 and sell 3x Sep09@40Put for 2.10. I also chose to buy 3x Sep09@40Call for 0.45. For the first time I have synthetic stock.
[-1.55 + 2.10 - 0.45 = 0.10] x 300 = 30 (-11.25 comm) = 18.75 (cr).
At September expiration, 9/18, MVL shot up to $49.95. I can choose to exercise my calls or just close out all my positions because I don’t see any more upside to MVL since the deal with DIS is pretty much guaranteed. So, let’s close out everything:
I sell my Sep09@40C which are now worth 10.00 and sell my long-term put acquired back in June for 0.25. I receive: 10.25 x 300 = 3075 (-7.5) = 3067.5 (cr).
To recap: I shelled out 1706.25 on 6/22. I received 547.50 + 18.75 + 3067.5 = 3633.75.
3633.75 - 1706.25 = 1927.5 net profit (a 12.85% gain on the entire $15000 put aside)
Had I just bought 300 shares + put on 6/22 => -42.19 x 300 = -12657 (-8.75 comm) = 12666.75;
and had I sold them on 8/21 for 49.95 + 0.25 = 50.20 x 300 = 15060 (-8.75 comm) = 15051.25, I’d be up 2384.5.
In this context, buying the shares on 6/22 would have yielded a better result on the entire amount set aside; however MVL’s behavior during the same period was also highly unusual with the takeover and the spectacular price increase. If the stock hadn’t shot up so suddenly, I am pretty sure that my method would have outperformed acquiring shares right away.
My point was that I never said that I was over-leveraging myself with options and that the method described above limits losses as well as lets you participate to the increase in price until shares are put to you or calls are exercised; while at the same time reducing your cost basis.
Frederic
April 21st, 2010 at 3:12 pm
At Interactive Brokers commissions for option trading is inexpensive. I think married puts are a fantastic idea. I have one buy-write position that is losing ground faster than I can collect the fat option premiums as I move month to month. Although I had a collar that worked well in the April cycle. Married puts, now that is an idea I can work with and leave the upside profits wide open.
June 9th, 2010 at 8:17 am
Kurt,
I think another way to answer Larry’s concern about starting out at max loss is by simply reminding him that the max loss is only achieved if the stock doesn’t rise all the way out to expiry. The theoretical day-by-day value will be a lot different however - if the stock moves even a penny up the moment after you buy it, you should be making a (tniy) profit already!
I think it would be easier to show with a diagram…hockeystick line for expiry payout, and a smoothed parabolic upward sloping curve for theoretical.