Bulletproofing A Married Put Trade

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

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.