How to Allocate a Large Amount of Capital

Greetings, Traders!

Today’s question comes from a gentleman that foresees a pretty big cash infusion in the near future. He wants to put his money in the market for a short period of time (4-6 months) and then use it for something else. He already has a trading account and is familiar with the RadioActive Trading strategies… and he DOESN’T want to just “park” his funds in a Certificate of Depression uh, Deposit  ;-)

Kurt I own The Blueprint and do like the method but it still seems that I have trouble picking the right stocks. For some reason my outlook on the direction goes well for a short time and then falls short of expectations. I have been able to improve some positions and have one position that is just barely Bulletproof at this time. Let me give you a scenario that I may find myself in the near future if you could point me in a direction to analyze. I have my house for sale and if it sells I will have $250K – $300K  that I will need to do something with for 4 – 6 months until another house is built. Could you suggest a strategy that I could look into for a possible short term gain but would protect against any loss at all?  A CD or money market account just isn’t going to get it as I would like to make some interest.

Thanks

John

 

John needs to realize that there is no way I can guarantee that his plays will make money, but I CAN help him see how to allocate those funds so they have a good chance of catching a winner or two, while NOT risking more than 5-6% of his capital.

Of course, John has “Bulletproofed” a stock before, meaning that he has used the RadioActive Trading Income Methods to do zero risk short-term plays that reduce the cost basis of his stock, while leaving a long-term put option in place protecting that stock. Once those short-term plays have reduced the cost basis of both the stock and the put to less than the strike price of the put, he still has the upside potential of owning stock– but NONE of the risk. He is Bulletproof.

Trouble with Bulletproofing is it takes a month or two sometimes to achieve, sometimes longer… and it may well never happen. He does run the risk of losing his 5-6% of capital and never seeing it again.

Of course, if Jon DOES Bulletproof his holdings…  which he has done before with at least one stock since he got The Blueprint… he will have a great place to park his cash… and will have ALL the upside potential that this market has been rewarding its players recently.

Keeping in mind that past results are no guarantee of future performance… look at my reply to John:

HI John!

I cannot advise you except to tell you what I might do in your situation.

If you want to get a larger return than with a Certificate of Deposit, you must acknowledge that shooting for that return MAY result in a loss instead.

If you put this money into the market, I would recommend following the principles of the FORTS (Foundations Of RadioActive Trading) CD. The FORTS CD is available from www.radioactivetrading.com for $89. On it I show that with a larger stake of $100K or more, one should:

1) Limit risk in individual trades to 5-6%

2) Make THAT risk be between 0.5% – 2% of your total capital… 1% is a good guideline

Here’s a f’rinstance: today (this reply was written to John on April 20, 2011, the day before this post)  I showed everyone a trade with EBAY:

Bought shares of EBAY $31.70
BTO Oct 2011 34 Put +$4.25
Total Investment $35.95
Guaranteed Return -$34.00
Total amount AT RISK $1.95 or 5.4%

Now, the above trade shows 5.4% risk to the capital in that particular trade, per 100 shares plus one protective put. The actual DOLLAR amount that the trade risks is $1.95 per share, or $195 total.

Here’s where diversification steps in… you do not know that EBAY will go up. Rather than to put your entire stake into EBAY, an approach that is more likely to flush out a winner is to put some into EBAY and some into other issues. But how much to apply to EBAY?

Well, if your stake is indeed $250K, then 1% of that would be $2,500. Using the above example, you could then buy as many as 1200 shares of EBAY protected by 12 Oct $34 puts and still have about $2400… just under 1%… of your total capital AT RISK.

This will tie up about 20 times as much capital as it risks… which is GOOD, because you can’t get into VERY big trouble that way. This is what we mean by F.I.S.T.: Force Ideal Sized Trades. You have a goodly amount exposed to the market as to upside, but if something goes HORRIBLY wrong with EBAY you only are out 1% of your capital.

Getting 1200 shares of EBAY would take out around $45K of your stake, leaving you with around $205K to allocate in other investments. If you are set on investing radioActively, look at the example above and lather, rinse, repeat. With 5 or 6 positions that risk only 5 or 6 percent apiece ( 5-6% of that particular stock or 1% as figured from your total portfolio), then you will have a good handful of stocks that MAY increase in the time frame you are looking to hold… but CANNOT lose you more than the 5-6%.

Got it?

Again, I can’t “recommend” to you this particular course of action… because I’m not your “make-you broker”… or your Certifiable Financial Planner… :-)  But it’s what I would do. Why? Because the market we are in seems to be increasing and the prospect of putting 5-6% AT RISK while positioning for the kinds of returns it seems to be cranking out looks like a good bet to me.

A short word of advice: If you are married or have others depending on you to make wise decisions regarding that capital, make certain that they are on board with you before plunking hundreds of thousands of dollars into the market looking for a quick return. It may be that you will make money, but they must understand that there could very well be a loss of 5-6%. Also, have a chat with your tax man about the consequences of such a venture.

Having said all this John…

Happy Trading!

Kurt

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.