Hello Traders!
In today’s post, a WONDERFUL technique for folks that are holding a stock that’s up from where they bought it, and don’t want to sell too soon… but also don’t want to end up regretting the decision to hold in case their stock turns back around and goes down.
So, I got a question about bulletproofing from one of my “free” Subscribers… not someone connected with the FUSION service just yet, but a window-shopper wanting to know if he could use RadioActive Trading Principles to Bulletproof his stock.
The Subscriber wrote in about his HL stock, which he purchased at $7.31 per share and which was up at about $8. Right here would be a good place to point out that I’m not in the business of giving ‘advice’… but I told him that he did in fact have a bulletproofing opportunity.
This Subscriber’s thought was to buy insurance for his stock position…not have to pay anything (net) for it… and leave his upside unlimited. Based on what he told me about his entry price and where HL was at the time, such an opportunity was there. His shares of HL had a $7.31 cost basis, so on 9/8/2011 I sent him the following (excerpted) email:
…here is how you may leave your upside potential open with HL, but not get hurt:
BTO Jan $9 put option @ $1.75
Your cost basis then for the HL stock is $7.31 + $1.75 = $9.06, and you have a married put that guarantees you $9.00 You have only .06 cents AT RISK.
Using this as a platform, you might then sell a covered call (Income Method #1)… the October $9 calls are bidding (9/8/2011) at .25 cents. Now you have a locked in gain and limited time exposure. After October Expiry, it is possible that you would have a bulletproof stock with unlimited upside.
Here’s a more complex method: sell a Bear Call Spread. If you sold an October $8 call for .60 cents and bought an October $9 call for .27 cents, you would end up with a net credit of .33 cents. The WORST possible outcome of this would be HL closing at $9, so that your long call expires worthless and you need to pay a buck to continue owning your HL stock.
We-e-ell… having already received .33 cents, that makes .67 cents that you would need to pay to hang on to a stock that’s gone up a buck. Your Jan $9 put will be in position for you to roll into a further Bulletproof status.
On the other hand, should your stock stay flat (it’s around 8 now), you will pocket the .33 cents, be Bulletproof, and have unlimited upside again.
Oh, and if your HL shoots for the moon during this period… your long call (that you’ve been PAID to own) will grow in value as well. You have a truly unlimited upside but zero risk to your invested capital.
Let’s look at a graph of what I’m talking about in the second ‘Bulletproofing” example from above. It’s well and good for me to say that my Subscriber could buy a January 2012 $9 put option for $1.75, making his total cost ($7.31 + $1.75 = $9.06) for an instrument that’s guaranteed to be worth $9 all the way through January 2012. It’s further okay for me to say that by selling the October $8 call for .60 cents, then buying the October $9 call for .27 cents, he could generate .33 cents to pay for his insurance policy’s “premium”. But we need a ‘visual’ to get the full effect:
HL at $7.31 cost basis, add a Jan $9 put and an $8/$9 October Bear Call Spread
Traders, do YOU see what I see? There is no break-even line in this risk/reward graph, is there? Here’s why… it cannot lose. The upside is still unlimited, and the downside potential has been stemmed to absolutely zero.
After October expiry, whether HL heads down or whether it goes up and outta sight… there is nothing to be lost and everything to be gained by holding on to HL.
Now granted, there are a few caveats and management techniques that go along with a setup like this… which is why I wrote a whole book on the subject… but if you understand anything about options you can see that I have put an unbreakable hedge around this stock but left the upside open in case it wants to keep going up.
Every Tuesday and Thursday at 12:00 noon Eastern Time (U.S.) I discuss opportunities like this. Be my guest to come listen in and watch on a free webinar!
Til next time,
Happy Trading!
Kurt
P.S. I’ve been asked to provide a link to the software that generated the above image. It’s the Custom Spread Tool on PowerOptions. Get a free two-week trial at www.poweropt.com/rat.
I'm Kurt Frankenberg, and I have discovered how to truly put the odds on the side on the individual investor.
I lkie everything about your info I just have not had enough time to check it out. Please have someone call me xxx-xxx-xxxx (removed for privacy) be sure to mention RADIOACTIVE TRADING
Thank you
jw
Excellent!… This is the type of trading technique I aspire to learn for all my trades!
It’s not to hard to learn, either… though there are a few caveats. Do you own The Blueprint?
Hi. Mike and Kurt:
In this down market I have had some insights doing a 3x Reverse ETF as my RPM setup and althought the ride is wild I am using a small test dose to formulate a model trading setup using a straddle RPM setup on either side.
e.g. TZA and TNA. I found the results confusing to follow at first but when I stood on my head ( mentally of course ) it all fell in place.
What is your take on inverse leveraged ETF RPM’s with controlled risk 8%. I use this higher number with my play money.
Best
Uwe
Using an inverse ETF is one of three ways to do an RPM with a bearish long term expectation. It’s probably the easiest to understand because all the Income Methods would be done without “standing on you head.” 😎
HT,
K
Hey guys;
Kurt? What martial arts form is predominant in Portugal?
Will follow the blog while there next week.
Happy Trading
Uwe
Hi Uwe,
If I were smarter I could tell ya! IN Brazil Capoeira and Brazilian Jiu-Jitsu are the big two… and they SPEAK Portuguese there… but I dunno what the martial art community in Portugal itself is like.
HT,
K
Kurt,
In this example, one of the options you listed was to do a bear call spread on the stock with a covered call strike of $8 and a purchased call of $9. Since the put was at $9, shouldn’t the minimum strike on the covered call be $9?
Thanks.
EddieB
Thanks for the Q, Eddie. The answer is NORMALLY, yes. That is, if you are simply selling a call against your stock, you want to make sure that that call is at or above the strike price of the put.
However..! With Income Method #6, that requirement is somewhat relaxed. Normally if I’m going to sell a call, I wait for the stock to perhaps approach the put’s strike price first. That way I get enough bang for my buck (or buck for the… you know what I mean).
Because I don’t have to wait for the stock’s price to move before applying IM#6, I nicknamed this Income Method “Gimme My Money NOW”.
If you check the graph, this play makes money and doesn’t lose it. I can’t say that about ALL Bear Call Spreads, but this one is set up so that if the stock goes up, 100% of the risk inherent in the Bear Call Spread is neutralized. Check it out and get back to me.
Happy Trading!
Kurt