How the ‘Money Net’ CATCHES Premium and Adds it to Your Stock

Still selling covered calls for income, and unhappy with the results? Well, you’re not alone. Many folks complain either of getting saddled with a loser… or seeing their horse run off without ’em!

Such is the plight of those that sell calls against stock that they own. It’s ONLY a good idea to do that if the stock pretty much flat-lines… doesn’t do much up OR down… because if your stock goes up more than 5-6% you’re going to have to say goodbye to a potential big winner.

Worse still, if you collect a small premium, say two or three dollars, for selling a covered call and it heads DOWN… well, that two or three bucks won’t be much of a comfort when your stock is down 20-30%.

Fortunately, we here at RadioActive Trading have more than just that one-trick pony. I’d like to talk to you today about a trade I recently closed with Chipotle Mexican Grill: CMG. It made me 5.94% in just five weeks, much more than I could have done with a covered call trade in the same time frame.

On September 2, when I decided to do a ‘Money Net’ trade (this is what I call Income Method #5: the Ratio Call Spread), CMG was trading around $163.50. I COULD have sold the September 2010 $165 calls for about $2.50 at that time. That would obligate a “Plain Vanilla” covered call seller to giving up his CMG stock at the $165 strike price.

BTW, If you want to check up on my figures, try the historical tools at PowerOptions (www.poweropt.com/rat). CMG actually closed a bit higher than that $163.50 price on the day, and the real-time example I’ll give below could have been done even MORE favorably later in the day.

Okay, back to the example. SO, as I mentioned, on 9/02/2010 I COULD have gotten $2.50 for selling the CMG September $165 calls. Here’s what I did instead, though:

Bought to Open one September $160 call option: 1 X $4.94 = $494
Sold to open TWO September $165 call options:  2 X $2.77 = $494

Check out the play above very carefully. I have opened up a position that, in the context of my CMG ownership, presents zero risk. That is, one of the short $165 calls is “covered” by 100 shares of CMG stock. The other short $165 call is “covered” by the long $160 call.

If your broker won’t allow you to do these kinds of trades, it’s possible to slide your account over to a better broker, even if you’re trading an IRA with a stodgy old firm that doesn’t ‘get’ this: there is NO RISK to applying this “Money Net”! No risk, that is, above buying and holding the stock in the first place. However, there IS a substantial possible return if the stock does what you hope it will.

Remember when I said that the best circumstance under which to sell a covered call is that the stock stays flat? You get to keep your stock, the premium from selling the covered call, and you can do it again. Let’s see just what would happen in this case if the stock DID stay right at $163.50. On Expiration Friday, your two short $165 calls would expire worthless, while the long $160 call would be left $3.50 in the money. That’s a dollar more premium than if we had sold the covered calls only, at $2.50 on the same day. This is what I mean by the “Money Net”. It’s like a trap for catching premium between the strikes of the calls.

If the stock goes down below all the calls, in this case you would gain nothing, but you would also lose nothing more than the depreciation of the stock. At RadioActive Trading, we have a solution for that as well, but right now I’m talking to you strictly about the “Money Net”.

So what DID happen last Expiration Friday, the 17th of September? Well, my CMG stock had appreciated to $168.31. There were a number of things I could have done last Friday:

1. I might have bought to close one of the short $165 calls for about $3.50. Now, that would have ended my obligation to deliver 100 shares of CMG at $165, which is GOOD when it’s trading at $168.31. That would have proven to be a good idea later, as today (September 27) I see CMG trading above $175. What would happen to the other short $165 call? Why, it would be exercised of course… against my long $160 call… putting $5 of premium back into my pocket. Hmmm! How about that: I pay $3.50 to keep a winning stock, and the ‘Money Net’ gives me $5 back for the trouble. It’s like being PAID to hang on to a winner.
2. I might have “rolled” one of the short calls. By buying back one short September $165 call, and simultaneously selling a November $165 or even $170 call, I would have captured more premium for my CMG stock. I would keep it for another month and be paid for the trouble. Of course, that stray short  $165 call would be assigned against the long $160, generating the same $5 credit discussed earlier…
3. I might just call it done, and allow the stock to be assigned. One short call closes against the stock and it’s called away at $165, and again the money net encloses a $5 premium that makes it AS THOUGH I sold CMG at $170 instead of $168.31

This last is in fact what I did.  Now, there was more to this trade than I’ve listed here: I also had a put option in place protecting CMG, and I got both it and the stock a few weeks earlier than when I did the ‘Money Net’ adjustment. But all in all, I got a decent, five-week return of $1,035 all told after buying and selling the stock and put, and allowing the ‘Money Net’ to capture extra premium.

Many of my subscription Members, coaching Clients, and business Associates have similar trades to this one in place even now. So do I! So you’ll be hearing more about the ‘Money Net’ soon.

Isn’t it nice to have more than ONE way to peel an apple? The tools, tricks, and techniques I’ve been developing and researching over the years are contained in a book called The Blueprint. Take a listen to to the first chapter free at www.radioactivetrading.com

Happy Trading,

Kurt