Another RadioActiveTrading Student BULLETPROOFS His Stock

Greetings, Traders!

I’ve decided that rather than bragging about MY plays, I’m going to start almost exclusively bragging about the plays of my Students.

This latest comes from Tom, who has been sitting on shares of XEC at a low cost basis for YEARS. Tom has shared the numbers with me and made them available for instructional purposes. I’m posting it here because I suspect there may be many more Traders in the same shoes as Tom: Having shares of stock that are UP… but no guarantees about the future.

This answers the problem that faces anyone that’s holding onto a stock that’s up from where they bought in. What’s a trader to do? We could sell right now because today’s price might be as high as it ever gets… or maybe we should NOT sell because after all, it’s gained so much, might it not just keep going up?

Hmmm… sell now and cap gains… hold instead and perhaps watch those gains go away…

NOT cool. Fortunately, there is a solution.

Here’s a TALL order… let’s say that Tom wants to:

  • 1) Bulletproof his stock, meaning that if it goes down, his investment does NOT lose value;
  • 2) continue to have an unlimited upside potential anyway;
  • 3) continue taking dividends on the stock, and
  • 4) turbocharge that income to receive even more than the dividend…

…can it be done? I mean, we might prevent losses by buying a protective put option. But that SPENDS money, doesn’t it? OR, we could generate some income by selling a covered call. But..! Then that would cap the potential upside. We’d be obligated to deliver the stock if it goes up.

SO, this is what Tom and I came up with. It’s pretty astounding, and covers all four of the above goals. He CAN’T lose, but CAN gain more than where he’s at now… and get paid two ways while doing it. Ready for this? Check out the following risk/reward graph:

Screen courtesy of PowerOptions Free Trial

It kind of looks like long stock, doesn’t it… with no limit on the upside as the stock’s price moves. Notice anything interesting? Here’s a hint: notice the distinct lack of a break-even line. Tom’s stock is in BULLETPROOF status: He can’t possibly lose any of his investment, no matter what bad news befalls the company or the market in general.

See, the RadioActive Profit Machine setup uses an in-the-money put option. But..! Because Tom’s stock was already up from where it had started when we met… rather than coaching him that he might buy an IN-the-money put option, I pointed out that an out-of-the-money put right now could lock in a return that’s higher than his original cost, PLUS the expense of the put.

Of course, as we’ve mentioned before, Tom would like to TAKE income for holding onto XEC, not pay for the privilege. Well, I’m not finished. Look at the PowerOptions ( Custom Spread entry that resulted in the above graph:

Screen courtesy of PowerOptions Free Trial

WHILE paying $3 for a September $70 put option, Tom also received a $1.80  credit. See, besides picking up a long put, Tom also sold a Bear Call Spread against his stock. That credit helped pay for the put. The put is LONGER term, and the spread is SHORTER term, so he’ll have the opportunity to do this spread more than once.

Now in the case of a Bear Call Spread, the last thing you want to have happen is for the stock to go up. You might end up owing more than you collected. Hmmm… but not in THIS context, because Tom also OWNS the stock.

When you own stock and it goes up, that’s not a bad thing. This Bear Call Spread has generated income with NO risk. Should the stock stay down, Tom keeps his full credit for selling the spread. If it goes up, the increase in value of the stock will more than offset the losses of selling a bear call spread!

In “short”, Tom cannot lose with this play, where before he was at the whims of the market whether his stock would retain value or not.

Let’s fast forward a few weeks after our first coaching session:

Today Tom is closing the short $80 calls on XEC. When I got off the phone with him just now, the ask was .20 cents.  He’ll leave the long $85 calls in place in case of a serious rally, and to save on commissions, but essentially he has ‘banked’ $1.60 per contract.

I’m pretty impressed with where Tom is right now: He has paid for more than half of his ‘ stock insurance policy’ (the $3 for the September $70 puts). He may now look for another spread opportunity. Because XEC has faltered a little bit, the September puts are worth more now than he paid for them, which is a bonus.

After the dust clears and (if) XEC goes up, Tom may be able to do another RadioActive Trading strategy that will not only keep his stock BULLETPROOF… but the market will also pay him to do it. I’ll keep you in the loop on that!

In the meantime, here Tom’s story so far: He has purchased September $70 put options as an insurance policy for $3 apiece. He opened Bear Call Spreads with ZERO RISK… because those spreads were done in the context of owning the stock in the first place… and has closed them so that he has banked $1.60 (at least).

Tom now is STILL holding long August $85 call options that may or may not be worth something soon… and has reduced the cost basis on his insurance policy, which is now worth more than he paid for it anyway. He has seven weeks to use one or more of the TEN RadioActive Trading Income Methods to pay for the rest of his ‘stock insurance policy’ and is a happy trader. I’ll keep you posted.

Happy Trading,


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.