Double-Dippin’… Taking Even MORE Premium

Still unlimited upside potential, $100 less risk

Okey dokey then Traders…

I’m standing by my assertion that we’re showing folks how to do credit spreads with zero risk. Today I’ve got a whole new one for you.

In the last “Episode” of Anatomy of a RadioActive Profit Machine we saw how to ‘nest’ a Bear Call Spread within a Married Put position and take a substantial credit… without adding ANY risk.

That is, we displayed an (August expiration) Married Put on Humana Resources… that had infinite upside potential… but only $940 AT RISK. Then, we opened an (April expiration) Bear Call Spread that took in a $100 credit, and by itself would  have $400 AT RISK. Combining the two, you would think that $940 + $400 = $1340 AT RISK but in fact it reduced the whole risk picture to $840 AT RISK.

“I’m often asked why I always capitalize the words, AT RISK. It goes back to what I learned in the 80’s about Walt Disney World employee policy. Woe, woe unto the Walt Disney Cast Member that referred to a “guest” in a written report without the capital G. It’s “Guest”, because the Guest was always the most important person in the park.

Well, I think the most important thing to consider in any trade is absolutely, always, first and foremost and to the end… the amount that you have AT RISK. And there you have it… the reason I always capitalize that phrase.

So ‘Nesting’ the near expiration Bear Call Spread that had $400 AT RISK within the Married Put trade that had $940 AT RISK reduces the risk of both.

Kinda cool. 😎

That’s how it works with a Bear Call Spread being ‘Nested’ within a Married Put. But there are other spread trades… that are done at a credit… that can be ‘Nested’ within a Married Put as well.

How’s about THIS one? Here’s an recent example from a ‘Nested Spread Trade’ that I did on LULU:

Sell to Open Two April $90 calls at $2.90: $5.80 premium
Buy to Open One April $85 call ay $5.60  -$5.60 expense
Net Credit Received:                                $ .20 cents

Well, that seems mighty nice, to take in a credit on the front end.

Know what’s even mighty nicer?

I call this bad boy the “Money Net” because it’s possible now to capture even more premium. For example, let’s say that on Expiration Friday LULU is trading at $89. The two $90 calls expire worthless so there is no obligation to deliver… but the one $85 call is IN THE MONEY by four bucks..!

In case you missed it, this Ratio Call Spread was opened at a credit of .20 cents, but at expiration has now captured an additional $4. That’s $4.20 total, a durn sight better’n if you had only sold a $90 call for $2.90 😉

Mmmm… but there has to be a catch, right? Yup. Take a look at the following risk/reward graph:

Unlimited Risk because one short call is naked

Ummm, yeah. I don’t dig the UNlimited AT RISK amount in this whole idea.

But, wait! Yes, I remember… we are “Nesting” this trade within another.

The Ratio Call Spread here risking an infinite amount is something I would NEVER do even though I do have the trading clearance. But if I own the stock, then what? Heh… there’s no problem at all.

In the case of the above, I was long 200 shares of LULU, protected by 2 put options. Now, without getting into the details of how I “Bulletproofed” LULU, just suffice it to say that by doing other ‘Nested Spread Trades’ I had reduced the cost basis of both the stock and accompanying put options to very close to the strike price of those puts. Lookee:

Nearly Bulletproof LULU RPM

Now, let’s count our blessings here. We’ve got 200 shares of LULU stock, insured by put options (June expiry, BTW). We have the ability to sell two April $90 Covered Calls against the stock, even with the lowest trading clearance. Oh, AND we can use the proceeds from that sale of TWO $90 calls to buy ONE $85 call… and still have a net credit.

Viva la “Money Net”. Because if LULU crashes, mmmm… so what? We keep the .20 cents credit and we’re pretty much Bulletproof anyway.

If LULU goes to $89 as I mentioned above… well, cool. The $4.20 credit I mentioned above applies and I STILL own the stock.

But I know what you’re thinking… the Ratio Call Spread had INFINITE RISK as the stock kept going up! That’s no fun at all if you latch on to a fast moving stock!

Heh… look at the combined “risk” (yes, LOWER case now… heh heh heh) picture below:

'Nesting' Ratio Call Spread captures premium but NO RISK

IN the case above, I opened a Ratio Call Spread (Buy one, sell TWO calls) at a small credit of .20 cents. The stock blew its doors and went above $93 a share. If I had done a “Plain Vanilla” Covered Call trade it would have cost me to hold on to the stock… but in fact I DID hold on to the stock… and got PAID a total of $1.70 to do so.

Curious as to how? Thought so. Stay tuned. Ooooh, or better yet, come to the Webinar coming up and I’ll show you exactly how I was able to get paid… TWICE… to hold on to an explosively moving stock… while risking nothing at all.

Wooo hooo! Getting interesting? ‘Like’ it or not, I’m going to keep posting!

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:

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…
Options Trading Wisdom From The Art of War
Taking Credit Where It’s Due
Bulletproof THIS, Part 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 Covered Call THREE Ways
What on Earth Is a Nested Spread Trade?

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.