This Trading Solves the Covered Call Sorting Machine

What this methodology solves for me is the consistent issues I had trading Covered Calls, Naked Puts (Cash Secured Puts) and Diagonal Calendar Spreads: The sorting machine aspect. Have success on 8 out of 10 trades, or 80% of your positions making roughly 3% on each, and have one position that drops through a stop order for a realized 25% loss. Right 80% of the time, still losing money, right back to square one. This, to me, is no way to actually grow your portfolio or your account value.

Over the years, I have talked with many covered call clients who say: “It does not matter what your bottom line is, as long as you can keep selling premium and earning 3% per month of what you have, you will do just fine.”

I do not agree with that.

If I have the track record I mentioned above month after month (be right 80% of the time but still lose money), I can look at it as still generating income on what I have but to me I see that as losing 1% or more of my value each month. That is not my personal goal nor my intentions for my trading capital.

In your example you stated that the Put option was the only position that you were losing on…but I see it differently. I see the put as its own asset. MOS moved up 10 points, and the put declined 7 points. To me, I see that as I still gained positive 3 points on the position. I gave up 7 points on my put, which I wanted to have in place because I wanted to guarantee a limited risk on my position, but gained 10 in the stock. Honestly, the way I look at a position like this is that I opened an ITM Married Put where I initially paid $5.87 in Time Value, and now that the stock has moved up my protective put has $9.27 in time value. I can swap time value now or adjust my insurance policy to lower my risk and earn, in my mind, premium or ‘bread’.

I see the change in the Call Option as the only part of the position that is losing…simply because, as we discussed last week, when I open the RPM I am expecting the stock to move up 5-8% in the next 30-60 days. Selling a call at all, at any strike, caps my gains on a stock I expected to move up in price. It goes against my approach of limiting risk and leaving the upside open. To me, the call is losing $200 as the price to close the call has increased. If I expected the stock to stay the same price or move down slightly, I might not see it that way. But, since I expected the stock to move up in price, the short call is negating my expectations for the RPM position.

Again, you say Tomato, I say Tomatoe. It is just a different way to view the position.

I am not using this technique to generate income to live off of on a monthly basis. I use this technique to protect my investment capital, to still take advantage of stocks that I feel will move up in price over time and to have a variety of ways to adjust the position if the stock moves up, down, or sideways. This approach, or these goals and actions may not match your personal CEGA model or accomplish your premium requirements. You may want to take some of the aspects that appeal to you personally from the RadioActive Trading techniques, and continue to apply those with your other adjustments in your Portfolio.

I would never presume to tell you how to trade, or that there is only 1 strategy that should be used in every market. I can only tell you that this approach has solved my investment concerns and the problems I had with Covered Calls, Naked Puts, Diagonal Spreads and Vertical Spreads, but I know that might not appeal to every investor. Of course, the RPM techniques are not the only strategy I trade in my personal accounts.