Why buy stock when you can sell a put option?

In the RadioActive Trading Techniques we essentially start every position by purchasing stock and purchasing an In-The-Money put option.  This setup allows us to take advantage of the classic trader’s axiom:

“Cut your losers short and let your winners run.”

Our losses on the security are limited due to the protective put, but we still have unlimited upside profit potential allowing the stock to run.

Now, if I try the alternate approach of buying the same, far out in time protective put and selling a short term put against it, I still have a limited (monetary) risk on the position but I have also capped my gain.  If the stock rises 10, 20 or 30% I take no advantage of the further upside profits and I may in fact lose money on the position if the stock moves up or down (two ways to lose).

I recently presented and archived a webinar that discusses the RPM setup and comparing the initial Married Put trade to:  Substituting the stock with a short put, substituting the stock for an ITM long call (creating an ITM Long Strangle) and thoughts on why the OTM long call is not the same as the RadioActive Married Put trade.

To access the webinar simply go to www.radioactivetrading.com and click ‘Free Webinars / PodCasts’.  From the webinar archive select ‘3 Core Principles and Trade Comparison (2/21/2012)’.

The entire presentation is very useful for any level of investor, but my thoughts on the RPM Married Put vs. the Calendar Put spread begin at about the 25 minute mark.

Mike Chupka
Director of Education – Power Financial Group Inc.

About admin