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Good Morning, Traders!
Okay, so I was looking at a variation of the RadioActive Trading Income Method #5, “Money Net” strategy and had a bit of an epiphany…
It went a little like this: “Okay, so I can think of a number of cases in which I would want to do this, but can I think of any circumstance in which I WOULDN’T want to do this?”
Here’s the revelation part… I came up empty.
Why? Because after looking at all the possibilities – stock goes down, stock goes up, stock goes sideways… in each circumstance the situation AFTER doing an Income Method #5 “Money Net” trade would be better than if I had not done it.
How is that possible?
The “Money Net” I’m referring to is a ratio call spread done at a credit. By buying one call at a lower price and 
selling two at a higher price, while the stock is trading at a price between the two strikes… it can be possible to take a credit on the front end. In the case of April 2011 options on SINA, we’re looking at picking up $1.70 in premium by selling two April $95 calls at $4.00 apiece… $8.00 total premium IN… while using some of the proceeds to buy one April $90 calls at $6.30. This opens up some interesting possibilities:
The first really cool thing about the ratio call spread, AFTER the fact that it can be done at a credit is this: if the stock stays flat or moves up a little bit, one will pick up 
even MORE premium. Check this graph to the right: the spread is begun at a credit, and as the underlying stock goes up even a little in price… the amount of premium “captured” by the ratio call spread increases.
“BUT…” I’m sure you’re saying. “Kurt, because you have sold TWO calls and bought only ONE, you are NAKED on one of the calls. As SINA increases in price, the ratio call spread will eventually become a LIABILITY since you’re obligated to deliver stock at the lower price!”
Ahhh, Grasshopper 😉 Let’s not forget that I’m doing this, as I do ALL of the Income Methods, within the context of owning the stock, and the whole shootin’ match protected by a put option.
Heh… when you already OWN stock, having a short call against it is not a big liability. Let’s take a look at a Bulletproofed RPM (RadioActive Profit Machine in which the combined cost of the stock and the put is lower than the put’s strike price):
- Bulletproof RPM
- A Case in Which Short Calls DON’T Limit Upside Potential…
Other Income Method and Bulletproofing Resources
Hey, didja dig this post? 😉 Make sure and share the love by commenting, liking, sharing it with a friend. And if you’re hot on these ideas of ‘nested spread trades’, ‘Income Methods’, and ‘Bulletproofing’… here’s is a short list of other free educational resources sponsored by RadioActive Trading:
Double Dippin’… Taking Even More Premium Than Covered Calls
Catching Premium Better Than Covered Calls: The “Money Net”, Part Deux
This Simple Trick Made My Stock BULLETPROOF
Coaching Client Steve S., Makin’ Star-BUCKS…
Options Trading Wisdom From The Art of War
Taking Credit Where It’s Due
Bulletproof THIS, Part Deux
I Got GOOGLE Slapped For Saying This
How NOT To Trade Income Method #1, Selling a Covered Call
Bulletproofing a Married Put Trade
Revolutionary “NEW” Technique Turns Your Trading Right-Side-Up
A Married Put Beats a Covered Call THREE Ways
What on Earth Is a Nested Spread Trade?
YouTube:
http://www.youtube.com/watch?v=5yDIR4t0rjc&list=UUPvzT0P7mUh6IifL6NT3IEw&index=33
http://www.youtube.com/watch?v=m1Y3MnrS3Bs&list=UUPvzT0P7mUh6IifL6NT3IEw&index=1
For Free Options Trading Educational Webinars Every Tuesday and Thursday, Register HERE
I'm Kurt Frankenberg, and I have discovered how to truly put the odds on the side on the individual investor.
I concur. This looks like the optimum way to trade Income Method #5 without capping the upside, by initiating the ratio call spread on half of the married put position. This does get me thinking about another kind of spread, called the butterfly spread, since the only thing that is missing is the upper call leg at the April 100 strike. However, I’m not sure if this can be done at a net credit or a very small net debit.
IM#5 definitely rules when near term put and call premiums are elevated. It might even prove useful after an Income Method #9 adjustment..
I am most definitely a firm believer in F. I. S. T. (Force Ideal Sized Trades) and will continue to use RPMs in bull, bear, and sideways market conditions. This is what provides the ultimate framework from which to launch the various Income Methods with possibly more to come in the future, IMHO.
Thanks James! Yes, it would be the “holy” GRAIL of Butterflies if one could figure out how to do it at a credit.
OTOH… when you think about it, the Income Method #5 adjustment is a bit like a butterfly, if we consider the stock + put as a long call.
Sure, it’s not EXACTLY the same… but if one buys a call, then sells two in the CONTEXT of a married put, it’s close. When I presented IM#5 at MIT for the New England Risk Averse Traders group I asked, “What structure does this remind you of?” Several audience members shouted, “Butterfly!” Of course that was to defend my reasons for calling the ratio call spread an Income Method.
HT,
K
when will be the next radioactive meeting at MIT?
Dunno! When the NERATS group invites me back I’d love to come. We got a lot of positive feedback from that last visit and talked about a follow-up, but I got pretty bizzy promoting my book and didn’t do it back then. I LOVED the kindness and hospitality of my hosts. Chris and Peter and the rest of gang…. love to come and see ya again.
This looks great! …. but …. How likely are we to encounter this possibility?
I’m just starting to play with these ideas, and have 3 married put positions currently. Well, I checked on all 3 and none of them have a situation where selling 2 calls would give enough funds to buy 1 call. One of the positions is close, I would make pennies (without counting commissions.)
Curious as I’d love to do this on all my positions 😉
Delphine, it MAY be the stocks you are trading. I’ve done this kind of trade… and SEEN opportunities to do it more often… dozens of times. Most recently, I demonstrated Income Method #5 (the Ratio Call Spread in context of a married put trade) in ALTR, SBUX, CTSH, and LULU. You could do it today on the May $125/$130 calls on RL for a $1.90 credit. Think I might 😉
Pretty cool, Kurt! 8)
The stock keeps marching upward and you have not capped the upside with this scaled back version of Income Method #5. ..And if the stock crashes, then the net credit that you received at the beginning of this trade will reduce your risk.
Thanks! Yeah, right now I’m working with a trade I’m demonstrating in the Fission’ subscription for LULU: When LULU was trading at $88.65 I showed an April $85/$90 1:2 Ratio Call Spread for .20 cents credit. NOW, shares of LULU are at $93.71.
I have one long $85 call, two short $90 calls, and 200 shares protected by put options (BTW, the LULU position is also “Bulletproof”… the adjusted cost basis for both the stock and put is LOWER than the strike price OF those puts). James, assume that LULU stays at its current level of $93.71. If LULU is trading there on expiration Friday, the cost to close one of the short calls will be about $4.00.
If I spend the $4.00 to close ONE of the short calls… the other short $90 call is backed by the $85 long call. That means that in the middle of the night my broker will buy 100 shares at $85 and deliver 100 shares at $90, a $5.00 credit. The net result? I took in .20 cents to open this spread, I “catch” another $1.00 credit… I end up PAID $1.20 to hang on to a stock that has gone up by five bucks. Kinda better than covered calls, don’tcha think? 😉
Happy Trading,
Kurt
Hey Kurt!
How do you scan or search for stocks that present the correct ratios?
Ben, thanks for asking. I did a whole webinar to answer this question today, and I think you can pick up the recording at http://www.radioactivetrading.com.
I’ll tell you exactly how I find these kinds of trades and manage them: PowerOptions has a suite of options trading tools that does all of my heavy lifting. You should check it out at http://www.poweropt.com/rat and get two free weeks, no cc needed.
I was a customer of PowerOptions for YEARS before “they” discovered “me” and the guys in the office began trading RadioActively. Now their platform (which, IMHO was ALREADY the best in the world for search and management tools) is the only one custom-designed to meet the needs of RadioActive Traders.
As I mentioned, PowerOptions does all the heavy lifting for me, as they search the best stock-option combinations to use with the RadioActive Trading strategy and do the math FOR me.
Thanks for the q,
Kurt
Hi Kurt, I looked for the archived recording about these ratio spreads, and didn’t find it on the site. Do you have a link to it. Thanks. Bob
Heya Bob! Can’t post the link here but you can write support@radioactivetrading.com to find it. I have one “management” video out for Owners of The Blueprint and a more advanced version for current Members of Fission’.
Thanks for your interest! The ‘Money Net’ is certainly an idea whose time has come.
Happy Trading,
Kurt
[…] Dippin’… Taking Even More Premium Than Covered Calls Catching Premium Better Than Covered Calls: The “Money Net”, Part Deux This Simple Trick Made My Stock BULLETPROOF Coaching Client Steve S., Makin’ […]
[…] Dippin’… Taking Even More Premium Than Covered Calls Catching Premium Better Than Covered Calls: The “Money Net”, Part Deux This Simple Trick Made My Stock BULLETPROOF Coaching Client Steve S., Makin’ […]
[…] Dippin’… Taking Even More Premium Than Covered Calls Catching Premium Better Than Covered Calls: The “Money Net”, Part Deux This Simple Trick Made My Stock BULLETPROOF Coaching Client Steve S., Makin’ […]
[…] Dippin’… Taking Even More Premium Than Covered Calls Catching Premium Better Than Covered Calls: The “Money Net”, Part Deux This Simple Trick Made My Stock BULLETPROOF Coaching Client Steve S., Makin’ […]
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[…] Dippin’… Taking Even More Premium Than Covered Calls Catching Premium Better Than Covered Calls: The “Money Net”, Part Deux This Simple Trick Made My Stock BULLETPROOF Coaching Client Steve S., Makin’ […]
The key item here is that you do this only on HALF of the married put position. Otherwise the upside is capped.
[…] Dippin’… Taking Even More Premium Than Covered Calls Catching Premium Better Than Covered Calls: The “Money Net”, Part Deux This Simple Trick Made My Stock BULLETPROOF Coaching Client Steve S., Makin’ […]
[…] Dippin’… Taking Even More Premium Than Covered CallsCatching Premium Better Than Covered Calls: The “Money Net”, Part DeuxThis Simple Trick Made My Stock BULLETPROOFCoaching Client Steve S., Makin’ […]