Anatomy of a RadioActive Profit Machine

Greetings, Traders!

In this post I want to begin a series called Anatomy of a RadioActive Profit Machine. We’ll chronicle the history of an RPM from beginning to end:

  • First the setup which limits risk but not potential upside.
  • Second, the application of an Income Method to reduce risk
  • Third, the concept of zero-risk credit spreads
  • Fourth, a zero-risk debit spread
  • Fifth, “Double dipping” or taking extra premium WHILE stock moves up

I think you’ll really dig it.

This information is spelled out in greater detail real-time for subscribers of FUSION… but I’ll present a scaled down version of it here for the common rabble 😉

Oh, and if you’re into it… Come to a special webinar presentation on July 9 to get all the pieces I’ve described above, PLUS. See you there!

Okay, so Part One – The Setup:

March 11. 2011 Humana RPM (RadioActive Profit Machine)
HUM  shares                $63.90
Aug 2011 $65 put       +$ 5.80
Total Invested               $69.70
Guaranteed Exit          -$65.00
Total Amount AT RISK  $ 4.70
…or 6.7%

Now, I know a lot of folks would say at this point “Kurt, why not just buy a long call? Isn’t that the SAME THING as a married put trade?”

IN a word… no.

There are a few misinformed souls that will argue this point to death… but the plain cold fact is that a married put and a long call are not identical. Their risk/reward graph looks nearly the same but that is where the similarity ends. Here’s why…

On the same day at the same time on March 11 2011 instead of a married put, you might have picked up an August $65 call option. That call option’s pricing would be a dime, maybe fifteen cents more than the AT RISK amount described above.

This is because all the pricing models (plus the market!) take into account that you DO have capital on hand to buy the stock, but instead you elect to buy a call option and deposit the rest at interest.

Why would one want to buy a call instead of a married put? “Why, in order to DO THE SAME THING only with less capital!”

Hmm. Okay, so the married put trade above requires $6970 for 100 shares and one $65 put option. That means you NEED to have $7K to even do the trade.

On the other hand, if you only had a thousand bucks to trade, you could put on the ‘identical’ position for $480, using up only half of your capital. Or you could use almost all of your capital and get in two contracts for $960.

Enter the Mathematics of Position Sizing

In the first scenario (the RadioActive Profit Machine), we used almost $7K to get into a position that risks only 6.7% of capital, but enjoys unlimited upside potential. In the second scenario (buying a call at the same strike and expiration but with less capital) we still have unlimited upside potential, and used only $480 of our $1K to buy one, or nearly EVERYTHING to buy two contracts.

Then disaster strikes. Bad earnings announcement. Huge lawsuit. Corporate structure upheaval. Overseas markets wobble, or terror strikes within the U.S. You name it, but something happens to seriously rock the market and HUM is now trading at $40 a share. Don’t laugh… I’ve seen it happen.

In the case of our RPM, RadioActive Profit Machine, only 6.7% of capital can possibly be lost, leaving $6530 or 93.3% of our original $7000 to play with.

But the guy that did the “same thing with less capital” is decimated. One contract costing $480 is gone, leaving only 52% or $520 to play with. I’m being generous and leaving commissions out of the picture, but you know they make it even worse than I’m saying. Oh, and if he picked up TWO contracts… well. That fella leaves the table with almost nothing.

The first and most important benefit of RadioActive Trading is F.I.S.T. — Force Ideal Size Trades.

This feature enables the user to only take trades that cannot hurt too badly in the case he is wrong. ‘Automatic Position Sizing’ occurs when the RadioActive Trading principles are followed, sparing the trader from debilitating losses and… hey, this is IMPORTANT… allowing him the opportunity to get into OTHER potential winners with a low risk as well.

IN the case of the RadioActive Profit Machine, losses are limited from the get-go to only a single digit percent risk… FORCING us into a position that can truly “cut losers short and let winners run.”

While the risk is limited, the profitability potential is not. I’ve ‘put’ together trades like this that only risked 5,6,7 percent but then ended up returning 30,40,50 percent. My friend Mike had an RPM last year return 59.8% in five months. He had 7% AT RISK the first month, made an adjustment that made him “Bulletproof” the second month, and went on to high double-digit returns. Doesn’t ALWAYS happen… but then again, sometimes it DOES.

Okay! That’s it for today. Principle One: “Don’t pick STOCKS… pick STOPS”. That is, get a contract on your stock that locks in the greatest possible loss at 5-7% at worst. Next post we’ll see how RadioActive Trading Principle Two works: “Don’t time trades… TRADE TIME.”

Happy Trading,


P.S. Hey, did ya ‘like’ this post? (hint, hint) 😉 Share it with a friend. IN a recent webinar, one of my poll questions was “If you could keep your winnings from last year, but your losses were reduced from whatever they were to just 6%, would you have had a better year?” EVERY SINGLE RESPONDENT said, “Yes.” Think about it.

P.P.S. To read more about RadioActive Trading, try the following links:

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.