So I’ve been asked a number of times about this phenomenon of “Bulletproofing” a trade.
“Bulletproof” is the term I’ve been using since 2002 to describe a trade from which I have removed all downside risk. The best part about a Bulletproof trade is the fact that I can hold it, even through earnings announcements and uncertain markets… and sleep like a baby that’s had a sip of bourbon 😉 At the same time, if my trade goes in the desired direction there is no limit to how high the profits can run!
So how does one make their stock “Bulletproof”? Well, with the RadioActive Trading method there are three vital ingredients:
First ingredient… the stock. A stock that’s a candidate for Bulletproofing must be optionable, liquid, and have good prospects for going up.
Second ingredient… one or more put options, one per hundred shares. The put option acts as an insurance policy for the stock owned. Adding a put option to stock still results in a bullish position, but that position is under strict protection. Called a ‘Married Put” or a “Protective Put”, this hedged position can be long- or short-term.
In the RadioActive Trading Method the put option’s expiration date is far away in time (several months or even years) and is purchased In The Money. That means that if your stock is trading at $50 and it’s January, you may be buying a $55 or $60 put option clear out to June or further.
Third (and MOST important ingredient for Bulletproofing): the so-called “Income Methods”.
Most of the Income Methods are ‘nested’ spread trades… trades that, by themselves might be risky but in the context of owning a married put are completely riskless. The result of most of the Income Methods is that the net cost for both the stock and the put option are reduced, so that eventually the cost basis is LOWER than the strike price of the put.
If, for example, we have stock at $50 and a $55 put option priced at $8, we may pay $58 for the married put. But the difference between the cost, $58, and the strike price, $55… is only $3.
In the case above with only $3 AT RISK, if it were possible to take in income of $3.01 by using Income Methods… short-term plays that add no risk and expire before June… then the cost basis for the stock and the put protecting it would be LESS than $55. Our stock would then be Bulletproof; it would have no risk and still have time left to expiry.
There are Ten Income Methods described in the RadioActive Trading flagship book, The Blueprint, but I’ll show only one here. I call it “The ATM Machine”, or Income Method #4 because it’s the fourth Income Method adjustment that I discovered and proved in live markets for my Subscribers.
Here’s an example from September 2006.
Sept 24, 2006
Buy 100 shares DIA $115.00
Buy 1 Jan 07 $119 put +$ 5.00
Total Amount Invested $120.00
Guaranteed Exit -$119.00 (because of the put’s strike)
Total Amount AT RISK $ 1.00
No, this isn’t the ATM Machine trade just yet… I’m coming to that. Just remember that everything I do begins with limited risk, then I either get out with a small loss, get out with a GAIN… or I make a trade “BULLETPROOF”. In this case, the risk was very small: $1.00 per share or $100 dollars total.
24 days after I put this trade together, DIA was trading at $120. The $119 put was down in value to $2.05… but who cares? After all, for the put to come down from $5.00 to $2.05, the stock had to go UP from $115 to $120. By my count, I’m still ahead.
Here’s what happens next: when one put contract comes down… so do the others. I was able to do the following adjustment on October 19, 2006:
Buy To Open Jan 2008 $128 put option $9.70
Sell To close Jan 07 $119 put option -$2.05
Total Debit of this Put Spread (IM#4) $7.65
Income Method #4 doesn’t look to be making a bunch of “Income”, does it? This riskless spread trade was done at a DEBIT… here I show an expenditure of $7.65.
But let’s think about it for a sec. My first investment was $115 for the stock and $5 for a Jan 07 $119 put… a total of $120.
My second investment was a “riskless spread trade” that swapped the Jan 07 $119 put for a Jan 08 $128 put… costing $7.65.
So far then, I’ve spent ($120 + $7.65) = $127.65…
…but I own a put option that GUARANTEES me the privilege to sell DIA at $128 any time I wanna, for the next fifteen months! There is no risk left in owning the stock, only unlimited upside potential.
This is what I’m talking about: BULLETPROOF means owning stock and a put, the combined cost basis for which is LOWER than the strike price of the put. When I’ve ‘put’ in only $127.65, but am GUARANTEED the right to get out at least $128, that’s a good place to be.
(Especially when DIA was poised to make a serious run up… check the chart!)
I forgot to mention the two best parts:
1) DIA pays a dividend to folks that own it… 😉 This ATM Machine play not only Bulletproofed the stock, it increased the time left til expiration from three months to fifteen months. During those fifteen months there were a number of times to receive dividends. Sitting on DIA means getting paid for the time
2) It’s possible… in fact EASY… to ‘nest’ OTHER trades within this one to take even MORE premium, while introducing zero risk. Nothing like having a Bulletproof stock that pays dividends, has an unlimited upside potential, and being able to use as many as nine other ‘Income Methods’!
To conclude this post I want to mention something about the POWER of holding a married put. A close friend of mine, Mike Chupka, was able to bulletproof one of his stocks last year… he bought SLW (Silver Wheaton) with only 7% of his capital AT RISK. Bulletproofing only took a month, but AFTER he was Bulletproof he was able to hold SLW through a veeeery interesting market. Mike ended up holding through earnings announcements and other slips and turns of the market… did several Income Method trades that risked nothing but that guaranteed a higher payout each time… and finally closed for a 59.8% gain!
Keep in mind that past performance does not guarantee future results. But ALSO keep in mind that if you are going to buy stock in the first place, it may make a lot of sense to secure your stock position by also picking up an insurance policy. And if that insurance policy ITSELF can be manipulated later on to take your stock trades from low risk to NO risk… well, that’s even better.
Traders, what do you think of this idea? I’d love to hear from you. Let me know what you think about Bulletproofing a trade by commenting below. Feel free to ask questions as well.
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…
What on Earth Is a Nested Spread Trade?
Options Trading Wisdom From The Art of War
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
For a free two-week subscription (no CC needed) to the PowerOptions “Search and Destroy” Platform for finding, managing, and BULETPROOFING these kinds of trades, Register HERE
Happy Trading!
Kurt
I'm Kurt Frankenberg, and I have discovered how to truly put the odds on the side on the individual investor.
i trade futures and seldom trade stocks—-would your site help me improve trading ????.
I think it can definitely help you with your trading. In fact, in the last four polls that I did during my online “webinar”, 100% of participants said that had they used the technique I showed them, their last 12 months of trading would have returned better for them.
Now, something I CAN’T do is GUARANTEE that you will improve your trading, because you are the one that has to do the work, make the decisions, and above all, BE CONSISTENT. If you are willing to do these things, RadioActive Trading can help you.
HT,
K
The principle is the same but if you want to hold the front-month future with a long-dated put against it you’re going to be exposed to changes in the futures curve…and if the curve is in contango, you’ll have to pay to roll your contract before expiry…
I think I understand your process and it makes wonderful sense.
Thanks Jay! Yes, what makes sense is limiting your losses in the first place, then if your stock takes off, NOT limiting that. The married put does a fine job of FORCING you to observe that old trader’s maxim: “Cut you losers short, let your winners run!”
HT,
K
Hi Kurt, very intriguing. Since reviewing your site, i put on a few just to get the feel of it. So far, the puts lose value almost exactly in line with the long common’s gain in value. So, while there is no risk, there’s no gain either. Just sayin….
Fred,
If the put was bought out a few months and in the money by at least a strike, its value should not decline lock step with the increase in the stock.
The put will retain time value, and lose some intrinsic value as the stock climbs. Even when the stock is at par with the put’s strike there is value left in the put.
Just look at any option chain and see what an at the money put (out a month or two)is worth.
Mike
Right on, Mike. Looks like you were replying to my man Fred there.
HT,
K
Well, I am almost certain that you are not doing the puts according to the guidelines set forth in my book and in my free webinars (to sign up for a free webinar go to http://www.radioactivetrading.com and click on “Free Webinars/Podcasts”).
If your puts are falling exactly in line with the stock, you are either waaaay too deep in the money, or too close in time. Did you go one, maybe two strikes in the money and at least 150 days to expiration? And with a fairly liquid stock with at least 300,000 daily volume, over 1,000,000 daily volume preferred? If so, I doubt that you would see a dollar for dollar drop in the put’s price.
Please let me know what issues you’ve been trading.
HT,
K
Hi Kurt and Mike,
Your method makes sense however, I am sure it is me but it is very confusing (not your fault) to get a handle on all of the management trading methods and WHEN to do them if and when I have to manage. What is the best way step by step to get started without making a big mistake?
Thank you,
Frank.
VERY good question. Well, you are forcing me to plug my book so I’ll have to do it 😉
The Blueprint has a number of “Income Method” adjustments and the decision-making grids that go with them. Owning THAT would be the best route to the step-by-step approach you were talking about.
Having siad that, however..! By buying a put in the first place to go with your stock, you will have done the most important thing: you will have limited losses to a very small amount in the case that you wre wrong about your stock. JUST by setting up your trade this way you will have predefined losses if the position goes against you or stays flat, but unlimited potential gain.
For the adjustments I would say that you really should get the book. But to get started, I would say stop picking stocks… pick STOPS. Pick a percent loss that you are willing to hazard… and keep that amount down into the single digit zone (5% or so) and diversify enough that even THAT dollar amount risk is less than 1% of your total capital. Do that, and it will be hard to go wrong in a bullish environment even without the Income Methods.
Happy Trading,
Kurt
Hi Kurt,
I did a small trade using married put for DEER
CHK 33.78
CHK 2011 OCT 36.00 PUT 4.47
Cost Basis 38.25
Insured 36.00
At Risk 2.25 –> 5.9%
Stocks move down to $ 30.86 ($ -2.92 of my CHK)
PUT appreciate to +$ 1.88
Unrealized Net loss -1.04
The Married put has limited by downside but just want to ask .. My long term ITM PUT should move dollar per dollar with my stock right? If stocks move down to -2.92, PUT should move +2.92?
Not necessarily. When your stock moves down, your ITM (In The Money) put will gain one dollar INTRINSIC value for each dollar that the stock moves down. BUT..! The extrinsic or “time value” portion of the put’s pricing will in most cases decay with the forward flow of time. This, plus the bid-ask spread, accounts for the put appreciating $1.88 instead of $2.92.
Had you sold a near term May $34/$36 bear call spread (Income Method #6), you would be “banking” that on expiration Friday, which would counter much of this loss. Say that spread paid you .47 cents… your .47 banked + the $1.88 would be $2.35… meaning that as the stock went down $2.92 your net loss would be only .57 cents.
.57 cents loss for trading RadioActively versus $2.92 loss for NOT having put protection and Income Methods… it’s kind of a no-brainer, isn’t it? At expiry, if DEER is still below $34 you would still have a married put position with unlimited upside potential, but a lower cost basis and less than 5% AT RISK. If DEER reverses and heads up above $36 you will be profitable also, because the net gain in the stock will counteract the loss in the bear call spread.
Whew. I know that’s a lot to take in, but the deal is this: RadioActive Trading skews the playing field so that there is unlimited upside potential, limited risk. You can’t BEGIN with zero risk, but by repeated application of the right Income Methods you may be able to eliminate the small risk you began with and become BULLETPROOF: the net cost basis for your stock and put is lower than the strike of the put. Then the world is your oyster!
HT,
Kurt
In the DEER situation above when you recommend selling a 34/36 bear call spread, the short call is below the strike of the original 36 PUT. I thought we were never supposed to do that. What am I missing? Thanks.
Yes, you CAN do a Bear Call Spread at a lower strike than the long put. You just really sholdn’t sell a ‘plain vanilla’ covered call at that strike. The PowerOptions tools help me a lot with the Catastrophe Report on selling a bear call spread. You can get two free weeks and a consult with Mike Chupka at http://www.poweropt.com/rat. Tell him I said “hi” and to show you how to use PowerOptions to determine if your bear call spread fits your needs.
HT,
K
Any post or anyone here knows how do I reverse method 6?
(I want to Sell Shares.)
Method 6 is:
Buy Shares
Married Put (ATM)
Sell Bear Call Spread (for credit)
Lilly,
Does this mean you have an active IM#6 in place and want to manage it? Or do you want to do the reverse OF Income Method #6?
Right, I need to reverse it, Kurt.
As I only got interest paid at short position, not at long.
Lilly, these questions should be submitted to support@radioactivetrading.com and have full information: date, strike and expiries sold and bought, net credit, etc. I’d be happy to put a second set of eyes on your position but need complete infromation. Thanks!
HT,
K
Do you roll up the puts, as the market moves up? locking in gains.. as long as you don’t spend as much on the put as the size of the roll. i use 25%.. Your system sound simple and logical
thanks
Nate
Your opin on “how to strategy” for AON, cost basis 4 for income with minimal risk. I am a subscriber.
David,
Thanks for the Q. COMPLETE sentences, please… is AON your symbol or are you referring to “All or None” oder..? Cost basis 4? Sorry man, I’ll need your five lines” Stock price, put strike and expiration and that asking price, total spent, strike of insurance, total amount AT RISK.
Thanks! I’d be happy to help but I don’t know what you’re talking about 🙁
HT,
K
[…] 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 […]
[…] This Simple Trick Made My Stock BULLETPROOF Bulletproofing a Married Put Trade […]
Hi Kurt,
I looked at your example. You did not account for the $2.95 loss on the Jan 07 $119 put. You cost would have been $130.6. The privilege to sell at $128 would set you back for $2.6/share max loss which is worse than where you’ve started ($1/share max loss).
Hieu
Your Bulletproofing in the example is after things have gone in the desired direction but what about just after establishing Married put the stock plummets!
Hello Jim, sorry! It appears we had an issue with notifications and I did not see your post until now. If the stock falls -20% due to an unexpected event, well, you should be thankful that the Married Put was in place and you can close the position for only -5% loss.
If you think the stock will recover, you can use different adjustments to lower the cost basis, reposition the trade and still be profitable if it recovers.
If you feel the stock will continue to move down, you can use other adjustments to profit to the downside (as I did with the ICON position in Fusion, with a 4% gain as the stock dropped -65% while I was holding it. Not great, but beats a -65% loss or even a -5% loss!)
If the stock plummets and you feel it is going to stagnate, might be best to take the small loss and liquidate the position and look for a better opportunity. Why wait for months if you are not receiving your desired returns?
Thanks for the comment!, and sorry for the delay in response!
Hi Kurt, could you please elaborate on how you managed the ICON position (in Fusion), which you closed with a 4% gain, when the stock dropped -65%?. Please let us know how you managed this position. thank you
Good information Kurt!
When you are buying the deep ITM put what it the typical delta you use? Is it true that if you go too deep ITM (e.g. delta < -0.75) then it will be hard to get a good fill on the spread?
Also it seems for dividend paying stock the extrinsic value of the deep ITM put is adjusted by the dividend amount, I even see this for puts that have delta close to -1. Occasionally I see deep ITM puts with extrinsic lower than the dividend amount, but I don't know if I can get a fill at the price. Do you have an success with those options?