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In this issue, I soapbox a bit about using proper money management and options strategies to reduce risk. But first, a quote from a fellow options educator:
“At a time when many options educators touted extraordinary returns while ignoring risk, Kurt worked hard to develop a risk averse approach to stock investing. That focus upon limiting risk serves him and his students well.”
– Christopher Smith, President of TheOptionClub.com
Well, there it was today in the market. My vindication. AGAIN… 😉
Sigh.
Today while the market gave most folks a black eye… the Married Put strategy came up smelling like a rose. No surprises for the followers of THIS blog, hmm?
In case you haven’t been following the RadioActive Trading blog for long, recently I was hounded by yet another “gunslinger”… a fella that identified himself only as “MarketMaker”. “MM”, as I’ll refer to him from here on out, wanted to tell everyone how much better he would do by using leverage to trade the markets. As a rule, I post positive AND negative comments…. giving detractors as much rope as they need to hang themselves in the end 😉
My method (called RadioActive Trading) is predicated on buying a Married Put and NOT using margin or any form of leverage, at least until after you have locked in a profitable status.
(BTW, a Married Put is when you buy a put option along with your stock. It’s also called a Protective Put because it protects the overall value of your position in case of catastrophe).
The RadioActive Trading method, while overall bullish, uses a great deal of caution: if something goes TOTALLY BATTY (hm… like TODAY…), you can get out of the position for a net 5% or 6% loss.
MM challenged me by saying, “Show me any winning trade of yours…. and I’ll show you how I would have done better with less money… by buying an ITM (in the money) call option instead.”
I’ll give ya that one, MM. Buying an ITM (in the money) call option, or buying stock on margin, or completely loading up on bullish spread trades would probably outperform ANY winning trade of mine… especially AFTER the fact… because they all make use of leverage.
Trouble is, leverage is a two-edged sword, and it cuts you down to size right quick in markets like today’s.
I countered MM by saying that any winning trade of mine could easily be outdone AFTER the fact. But that’s not how trading works. Naw, shucks… it’s almost like you have to make your trade BEFORE you know what’s going to happen.
To quote my favorite Jim Carrey character…
“Man! I am TIRED of bein’ RIGHT..!”
-Ace Ventura 😎
Actually, I’m not tired at all. I like being right and today I’ve been shown to be right yet again. Today I closed FIVE losing trades. Not ashamed of it… actually a bit proud. Let me clue you in why I have a bit of swagger in my walk today, losses notwithstanding: the reason that I use the Married Put (or Protective Put) in the FIRST place is because days like today do happen.
Here are the trades I closed near the end of today’s bloodbath:
Stock: % Loss: MY % Loss:
ABX 8.0% 3.6%
INFA 15.3% 6.0%
VMW 15.6% 6.6%
ALTR 21.8% 5.6%
CTRP 18.7% 6.8%
I have a number of winning positions left right now, but it’s not the winners that we need to discuss on a day like today, is it? The average loss on an unprotected stock above was 15.88%. MY average loss using the Married Put strategy was only 5.72%.
Here’s an example of one of the above setups:
ALTR shares trading at $48.47
Buy Jan 2012 $55 put at +$ 9.80
Total Invested $58.27
Guaranteed by Put: -$55.00
Total Amount AT RISK: $ 3.27 or about 5.6%
Now, the last time I played ALTR I made 12% return in seven weeks. But it’s not how much you can make, it’s how well you control your losses. In the case of ALTR I might have been right only once and wrong twice in a row and still not be hurting for it. THAT’s the power of proper money management.
Y’know? Just this morning I did a free educational webinar in which I asked the audience of over 60 participants, “If your losing trades last year were cut from whatever they were to 6% or less, would it have been a better year?” Guess how many said yes? Heh… 100%.
When I further went into details- “In what way? Could you give a dollar amount?” 36% said they would have been VERY happy with last year’s trading as opposed to only 3% baseline…
31% of attendees said the free info, if received twelve months earlier would have meant the difference between a losing and winning year… 18% said they would still have lost overall but lost much less… a startling 35% (!!!) said that the information about Married Puts that I gave in my free webinar would have made them over $10,000.00 in profits… if they had only practiced it.
Wow.
How ’bout you, buckaroo? You up for a shootout with yers truly? Who else wants to tell me that their highly leveraged bullish play really is the way to go… and who might like to face facts?
Not trying to be a pain in the you-know-what… just saying what I say EVERY time on this blog, only a little louder today. Because some of you were listening and some were not. If you were trading a married put and forcing yourself not to risk too much, bully for you. Because you actually have some capital left over — with which perhaps you may now buy at the bottom.
If you WEREN’T hedged today, I told you this day would come. Sorry.
Okay, time to come down off the soapbox. I know some of you are not appreciating me crowing. Question is, will we now decide that there may be something to this RadioActive Trading idea called FIST: Force Ideal Sized Trades. I hope you do. “Like” me, love me, or hate me… post it below.
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’m extremely happy with the married put strategy! It saved my bacon on SSO, CAG, & NVDA. However, I’m quite disappointed with the position analysis portion of the profit/loss portfolio of the power opt website.. It’s not showing the true position cost resulting in an inaccurate liquidation gain/loss figure. After calling for help, I found out that this was a known issue. It needs to be fixed ASAP!
I’ll forward your concern to the boys at PowerOptions. I’m glad you are happy with the Married Put strategy. What would your losses have been if you did not have the wisdom, foresight, and instruction on how to use Married Puts for protection?
Happy Trading,
Kurt
I’ve read some of your material before & been interested, but unsure where to start, or what outcome to expect (apart from limited loss).
I closed out several Covered Calls last night in an orderly way, at what had been described as the “break-even” point. In truth, it was very expensive, costing several times the planned profit. Perhaps I need to find out more about your method.
Here is a quick comparison of Married Puts to Covered Calls:
Doing a Covered Call you get paid a small sum for taking on ALL the risk of a slide in stock that you must hold, or unwind the whole position in case of a downturn. There is limited upside (say, 5%) and lots of risk (pretty much everything) .
Doing a Married Put you pay out a small sum to absolutely guarantee an exit (say, at 5%) while you hold a position that could potentially double, triple, or quadruple in size (pretty much an unlimited upside).
Which is smarter? Well, while it seems kinda sexy to receive a credit… get PAID… while sitting on a stock… it’s a strategy that is long term self-destructive. Selling Covered Calls sorts good stocks out of your account while leaving you with losers.
The Married Put simply reverses that situation: it protects you from the downside moves while leaving your upside totally open.
If it were anything other than the stock market, and your best friend asked you this: “Ken, I’m thinking about two investments. If I’m wrong about the first, I could lose a whole lot but it’s possible that I could make 5%… the other, if I’m wrong about only LOSES me 5% but I could make a whole lot.” What advice might you give to your best friend?
Perhaps you DO need to find out more about the method, hmm? 😉
Happy Trading,
Kurt
Hello Kurt,
a great BIG thank-you your way buddy!!
Your post today rings loud and clear!
I have 5 trades on; all with Protective Puts that kept my losses under 5% on each. I really had to turn off the News as it was all about dark clouds over-head. Since reading your Blue Print book and using the Protective Put to limit risk and preserve capital; I am able to stay calm, cool, and collected, PLUS sleep well at night.
keep up the great work
signed,
Protective Put Team Player
Awesome, Ian!! Now you have the luxury to sit in cash and wait for a confirmed upturn. The sleeping well at night thing is really something, isn’t it? 😉
HT,
K
Hi Kurt,
Good on you. However, I don’t quite understand how you got out of your ALTR position today at a 5.6% loss when the guaranteed put position of $55 takes effect only at expiration in Jan 2012.
With ALTR closing at $37.55 today, that gives you about an $11 loss on the stock. You would have sold your $55 put, but the $3.27 (5.6%) max loss you publish is at expiration, not when closing out early. It has been my experience that closing a position early always results in a greater loss because of the delta position of the put option being less than 1. So it does not protect the downside “dollar for dollar” as the stock decreases in value.
Thanks in advance for your explanation.
Peter,
European options can only be exercised on the expiration date. These are American style, which menas that they can be exercised at any time before expiration. Doesn’t take effect in 2012, baby, it takes effect when I want and that was YESTERDAY. 🙂
Closing a position early does not result in a greater loss. When has that been your experience? Almost always when I close out early I actually sell the put and stock separately for combined proceeds that total MORE than the strike price of the put. If the put is deeeep in the money that’s not always possible. But it should actually NEVER be the case that you get LESS than your strike price back.
Have you been selling your stock and put separately, using market orders? That’s the ONLY way I could see you having the experience of taking less than your strike price out of a married put position. By the way… don’t do that 🙂
Happy Trading,
Kurt
Kurt, Your position has low downside risk, which is capped. The underlying equity needs to see a return of 20% (over six months) gain in price just to break even. If you sold a 45 put and bought a 40 put, you would have maximal risk of less than $3 and the stock could fall 7% and you’d still have a complete profit (though it would be a capped profit limited to the difference between the two put positions). Strangely, this is a new concept for me after years of selling options for a small profit over time. Thank you.
Nope. My underlying equity does NOT need to appreciate by 20% just to break even. Consider the following trade:
Sept 14, 2010
Buy shares ALTR $27.35
BTO March $29 puts $ 3.50
Total Invested $30.85
Now, to the uneducated eye it may seem that I need to see the stock go to $30.95 before I make a dime. Not so. This is because of two things: 1)as the stock rises, the put option does NOT come down dollar for dollar because it is six months away… 2) Because I own the stock I am able to do ‘nested spread trades’ against it. These nested spreads take a credit but do not introduce risk.
In the trade detailed above, by one month later the stock went to $29.40. Remember the “break even” was supposedly $30.85? After two riskless adjustments ALTR was guaranteed to have a payout of at least .75 cents a share. That is what my cap became, not a cap of losing 6% on the downside but a cap of “worst case scenario is that you only make .75 cents” but the best case still being an unlimited upside.
I posted all these trades real time with real dollars to my Subscribers. It ended up making well over .75 cents a share… actually bringing in 12% (okay, 11.9% after commissions on 500 shares and 5 puts) in seven weeks.
The best part was eliminating ALL risk before an earnings annnouncement. 20% gain just to break even, my eye! There is still a lot for you to learn, my young padawan 😉
Happy Trading,
Kurt
I am relatively new to trading and even more so to trading options. I have scoured many websites for information, tried several methods but find myself coming back to your method of trading.
Just recently I read your book and tried a trade purchasing Haliburton (HAL) at about $55.50. I also purchased a married ITM Jan12 $65 put, which put my break even at $67.27. Of course we all know what happened and HAL has fallen 7 points since that time. Knowing my worst case loss could be only 4% was comforting. Actually the put + stock is worth about $66.50 as I write this and I could get out of it right this moment for a loss of about 1.5% versus 13 or 14% with the stock alone.
I am considering selling a $50 call tomorrow and then closing out the position but am not sure if this is the right direction to go. Something is telling me I should just close out the position as is and get out with a minor loss.
I am strongly considering purchasing the Blueprint to try to understand my options with my positions.
HOOOOOLLD yer horses there, Trigger!
Do NOT sell a call at the $50 strike while you are holding stock and a $65 put. You may get lucky once but that will only reinforce a rather BAD behavior. You will take your 1.5% loss and likely turn it into a much bigger one.
Remember that selling a call obligates you to perform. Say HAL rolls back on up to $55 or better. While you do get a small premium, you have obligated yourself to deliver at more than $5 BELOW where you bought in. Meanwhile, your put is losing value. NOT a good plan sir. Get The Blueprint before selling calls willy-nilly like this.
Happy Trading,
Kurt
Thanks, I sold, and took a 2% loss….much preferable to the 15% I would have taken with the stock alone…..
I’m so glad you were trading with a Married Put! 2% loss is no fun, but sometimes you have to take lumps. A FIFTEEN PERCENT LOSS would really suck. Good for you, Ron, for thinking “safety first”. Now you’ll have 98 of your marbles to play with when that stock bottoms. Preserving your capital like that makes for more…
Happy Trading!
Kurt
Very good and infomative. For the first time I bot a put, not a married put. Bot the put a few weeks after buying the stock. My put expires in Oct. However, wouldntyaknowit, the stock NLY that I bot the put on hardly went down. Should of bot puts on everything else I own. Here’s what happened. I bot NLY at 18.69 and didn’t buy a put. When it went down to about 17.50, I bot a put for 17. Is it better to buy in or out of the money puts. I know this is not a married put question, just a put question. Re married puts, how far out should you go…expire in one month, one year??? Anyway, thanks for the article and from this day forward I will splurge and do the married put thing.
“Splurge?” Heh, do you think it’s splurging when you buy car insurance, or is it a necessary evil? How about life insurance, health insurance, home insurance? Yeah… some folks don’t really appreciate the value of the 5% or so that they spend insuring their stock but when the time comes, look out! Your put option is like a lawyer: good to have one adn not need him than to need one and not have… heh heh hehhhh…
HT,
Kurt
Hello Kurt, I have your blueprint on RT and have used your system on papertrade stocks because I haven’t read all your methods or understand them. Like method no. 6, After I buy the stock and the PUT 6 months out. I then do a vertical spread on the first two calls OTM for a credit. But I don’t know what to do after that. Can you help me learn how to manage the trade after that,don
Yes, Don… your Blueprint purchase comes with support. But you need to submit this question to support@radioactivetrading.com to have it answered. Hint: there are three alternatives for managing Income Method #6, depending on what your goals are and what the market does.
Happy Trading,
Kurt
read your blog today after yesterday’s crash. i was in only one position HOU ( the bull oil etf on the toronto market ). I got out with a 4% loss unhedged…but I had to watch this one like a hawk. Had I not pulled the trigger early in the morning I would have suffered triple the loss.
Lucky you. Good thing you didn’t need to use the bathroom or pick up your nephew from violin practice or anything 🙂 No, I am glad that you used responsible money management and did not get hurt. The Married put method would have allowed you to be in Belize this week and still have your 4% protection in place when you came back. It’s the polar opposite of day trading.
Happy Trading,
Kurt
Do you have to close out these trades? Couldn’t you do an IM or two to help mitigate the % losses? Maybe a Call credit spread or roll the Puts?
(P.S. Thanks for the weekly webinars… You’re great!)
Thanks for the kudos, Jamie! You’re great too, I always appreciate seeing you there. In answer to your question, NO, you don’t have to close these trades and YES, it is possible to use Income Methods to adjust them.
I just think the tradeoff risk-wise for holding them any longer is outweighed by the warm feeling of cash in fist 😉 Therefore, I take my little bitty lumps now and hold the cash until a new confirmed uptrend, during which I will buy new stuff.
You COULD play these guys for a gain… but you could also end up chasing them and losing more. Why bother?
Happy Trading,
Kurt
Your example of ALTR may exposed you to a big loss if during expiration date the stock price is only $49.0.
Stock $48.47
Put at $55. cost $9.80
______________
Total expense is $58.27
Possible scenario during the expiration date:
Stock $49.00
Put expires worthless 0. Thw $55.00 guarantee does not materialize
Total loss is $9.27 ($58.24 – $9.80 Now worthless)or 16% loss
I am correct? I think there is a better way than this.
First, the assertion displays that you don’t understand automatic exercise. If the stock is at $49 and my put is a $55 put at expiration, then my broker… and every broker that I am aware of… will take the shares out of my account and trade ’em for $55. So the loss is only $58.27 minus $55, or $3.27… that’s 5.6%, HARDLY a “big loss”.
And if your broker doesn’t do automatic exercise then it would pay not to take a nap during the closing hours of Expiration Friday, now wouldn’t it? 😉 You simply exercise your put during market hours and get the same result: WORST CASE SCENARIO 5.6% loss.
That takes care of the first part of your point. I will concede that I could lose up to $3.27 (not the $9.80 or so that you were alluding to) in this case but again… that’s “IF” I hold until expiration.
Well, now, that’s a big “if”, isn’t it? Yes, I acknowledge that “if” I held all the way to expiration… and “if” I made no adjustments… and of course, “if” the stock went to $49 and no further… then I would suffer that $3.27 loss. But here’s the thing: TWO of those THREE conditions are absolutely within my control. I don’t know what the stock will do, but I can choose whether or not to hold til expiration. I can also choose whether or not to make adjustments along the way.
This further whittles down my exposure: I almost NEVER hold all the way to expiration… that’s why I’ll pick up a put option 6 months away. I’m usually out about three months in or less… sometimes in eight days or so like the GMCR example I used above. Buying a six-month-out put doesn’t mean that I have to hold on to it that long. Not in America anyway. European style options are more stringent but in the land of opportunity I get to close any time I want 🙂
Thanks for the comment D.S.! Look further into the strategy… pick up my free white paper called The Sketch on http://www.radioactivetrading.com.
Happy Trading,
Kurt
If you buy a put for insurance, doesn’t the put take away from your gains if the underlying stock goes up? And wouldn’t the underlying stock have to work harder to cover the value of the put? What if it covers JUST the value of the put? Wouldn’t you then have a zero transaction minus commission costs?
Hi Kevin! The answer is both YES and NO; yes you will gain less with a married put than with straight stock if it goes up… but NO, a married put does not necessarily take away from your gains like other strategies.
For example, say my stock goes up 30% immediately after an earnings announcement and my married put’s net position returns only 15%. Well, first off I may not have had the courage to get IN to a position that could offer a return like this… because a stock that can rocket up 30% from an earnings announcement might also CRASH by 30% from the same event… unless I had put protection in the first place. Secondly, if I had written a covered call against this stock I would only get, say, 3% to 5% as it gets called away from me.
Fact is, the exact trade I just described did happen to me with GMCR. It’s certainly not my most spectacular win but it was quite a good eight-day gain, netting me 15% on my entire investment in 200 shares and 2 puts, or about $2100. Two points to review: if I had not had put protection limiting my possible losses down into the single digit zone I wouldn’t have gotten in, and if I had done a covered call it would NOT give me the protection OR the upside potential that my married put did.
So does trading a married put take away from your gains? You get less on the way up than straight stock, but I’m no prophet. I don’t know what’s going to happen. It hurts a DANG sight less on the way down, so there’s my tradeoff. But At least I’m not making a very foolish tradeoff like limiting my up-side and leaving my downside unprotected, like selling a covered call would do.
Happy Trading,
Kurt
When doing a married put do you do them simultaneously or wait some period to place the put in place?
Thanks
Larry, I always ‘put’ on both legs of a married put play at the same time. That doesn’t mean that if somebody has stock already that they couldn’t add a put to their position. I encourage that, especially if the stock is higher than when you got it.
Using the Income Methods (Nested Spread Trades) you may then pay for your insurance policy and then some.
HT,
K