Isn’t the long-term ITM put option that RAT traders buy too expensive?
I had the same aversion to Kurt’s technique when he first told me what he was searching for on PowerOptions. I had abandoned covered calls and naked(cash secured) put selling a few years prior, and was focusing mostly on standard collar positions.
When I saw the setup I thought, “Kurt, you are paying too much for the put option and you will not realize a profit until the stock moves up 15 or 20%”.
Kurt then showed me the fine points of his technique. When we open the RPM we are not down 5-8%. We are not 5-8% ‘behind the 8 ball’, as it were. When I open an RPM I can immediately close the position for a loss of only $0.05 or $0.10. All I am losing is the bid-ask difference of the put option.
If the stock moves up we are always gaining positive delta. If the stock stagnates, we are not losing value on the put option. This is the benefit of buying the put option far out in time. If I bought a near term put and the stock stagnated, the time decay would erode rapidly. With the long term put we do not see a rapid time value decay.
If the stock is stagnating I still have a few Income Methods I can trade to take in premium and not increase the risk on the position. There are Income Methods that can be used if the stock is falling, as well.
What really convinced me that this was the way to trade is the concept that the put option is not just insurance for the stock. The put option is its own investment that can be manipulated and adjusted to lower the overall risk on the position. As the stock moves up or down, we can swap the time value of the put option to reduce the total risk of the position and potentially bulletproof the trade.
Think about it this way: If you were going to buy a straight call or put speculating on market movements, would you buy an option that expires in the near term…? No, every long call or long put speculator will tell you that they buy calls or puts that are at least 5 months or more out in time. If you are selling premium, as in Covered Calls or Naked Puts, do you sell an option that has 6 or 8 months to expiration…? No, you sell in the short term to increase the annualized return and to be able to manage the position more effectively.
These are the concepts that we take advantage of, in our favor, when we trade RadioActively. The put option is an investment that we can manipulate, which also insures our position so we are guaranteed to only risk single digit percents on our stock position.
I'm Kurt Frankenberg, and I have discovered how to truly put the odds on the side on the individual investor.
I think what’s pretty neat about this strategy is that the time value of put goes up as the stock price approaches the strike price of the put. Thus, in the absence of significant time decay, the break-even point occurs at a price point that is much lower than the strike price of the put, such that if the stock price goes up just little bit in your favor, then the married put position can almost literally start off with a net gain instead of a net loss, after overcoming the bid/ask spread on the put.
Also, if the stock goes down, then a very large move to the downside must occur in order to achieve the maximum loss of 5 to 6%. Anything other than a large move to the downside may result in a loss of 1 to 3%, with time decay held to a minimum.
And the third and most important point is FIST (Forced Ideal Sized Trades). Without this, it is possible to be right far more often than wrong and still lose a significant amount of money. Not doing this is what is truly expensive, IMHO.