This Simple Trick Made My Stock BULLETPROOF

Ahhh, BULLETPROOF. Imagine sitting on a stock investment that could potentially go to the moon… but if it crashes you can’t possibly get hurt. Sounds like a dream but it can happen with the proper use of a married put.

“Bulletproof” is that wonderful status when the net cost basis for your stock and put is LESS than that put’s strike price.

What that means is… while you are sitting on a stock that’s doing well, there is no limit to how much it can gain. On the other hand, if the market suddenly turns there’s no skin off your nose. Get it? Net cost basis for XYZ plus the $50 put on XYZ is LESS than $50. You can win, but can’t lose from there.

Can it be done? Yes, and more easily than you might think. Consider the following, actual trade that’s been posted on the blogosphere for more than five years:

September 24, 2006
Buy 100 shares DIA             $115.00
Buy 1 January 2007 $119 put   +$  5.00
Total Invested Amount          $120.00

Folks that understand “moneyness” will look at the above trade and see that the put option is four dollars in the money. That is, there’s four dollars difference between what the stock is trading for now ($115) and the put’s strike price ($119). Therefore four dollars of the put’s pricing is ‘intrinsic value’, while the remaining dollar of the put’s pricing is ‘extrinsic’, or ‘time value’.

Now, as DIA went up… the put option came DOWN. That makes sense, right? On October 19, less than a month later, DIA was trading at exactly $120 intraday. What do you suppose the value of the put option was? It was down to $2.05.

Hmmm… interesting. The put wasn’t at ZERO because there was so much time left to expiration… still about three months to go. The stock had gone up five dollars, but the put dropped by only $2.95.

Why is this significant? Well, if you recall… the “time value” of the Jan 2007 $119 put option HAD been $1… but now that the stock has gone up and even though nearly a month has passed… the time value of that put has actually INCREASED to $2.05.

(BTW, this phenomenon happens nearly every time I buy a stock and a put option that’s far out in time… and the stock goes TO or ABOVE the strike price of the put. I wrote about this in a book I call The Blueprint back in 2002.)

Now, you might point out that, though the time value of the put has inflated, the total value is down significantly. All of the put’s intrinsic value is gone, and the put is after all down in price by $2.95.

Then I would point out, “SO what? Yes, the intrinsic value of the put went away, but in order to do that the stock had to go up by at least as much. And I own BOTH.”

Ahh… starting to see where I’m going with this, Traders?

Now here’s the simple trick I was telling you about in the title of this blog post: I sold the Jan 2007 $119 put and in its place bought the Jan 2008 $128 put.

Buy to Open Jan 2008 $128 put    $9.70
Sell to Close Jan 2007 $119 put -$2.05
Net DEBIT                        $7.65

I call this play the ATM Machine. That’s because you can take money out of an ATM… but only if you first put some in! Also, because you can do this play when the stock is At The Money of the protective put.

The exciting part is this:

Buy 100 shares DIA             $115.00
Buy 1 January 2007 $119 put   +$
5.00
Total Invested Amount          $120.00

Plus the Net DEBIT…         +$  7.65
NEW Total Investment           $127.65

Now I’ve spent $127.65… but now I am sitting on stock plus a put option that guarantees me at LEAST $128. That’s what I call Bulletproof; if the stock goes up I win, but if it goes down, so what? I cannot fail but to take more out of this position than I have ‘put’ in it. Furthermore..! Instead of 3 months to expiration, there are now 15 months to expiration. Did I mention that DIA pays a dividend? Heh heh heh…

I could bore you now with the details of what happened next… but I’d rather let your imagination run.

So, we’re Bulletproof, we’re sitting on a stock that pays dividends, and there are TEN different Income Method techniques to continue to milk this bad boy for income.

If you’ve ever come to one of my free twice-weekly webinars, you know that I give away one, two… sometimes THREE of these Income Methods. The most intriguing are the ‘nested spread’ trades that, just like the bulletproofed married put… CAN win, but CAN’T lose.

Can you imagine doing a credit spread that couldn’t possibly come back and bite ya? Heh… I can…

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…
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.