How I Finally Reversed the (BAD) Luck I was Having with Covered Calls – Part TWO

In today’s installment: How to pick the appropriate put option to protect your stock from loss, and how to get the very best deal when you buy it.

‘Morning again. (YAWN). So, where were we?

Ah, yes. Yesterday I wrote ya about the first way in which I began to change the (bad) results I was having with the tired, old, FLAWED strategy of selling covered calls.

I began to change my behavior… which in turn changed the outcomes. Dramatically, I might add:

RadioActive Trading: The Beginning

In 2002, I had people following my weblog (later called a “blog”) and they were really impressed with the good results I was having trading YHOO, EBAY, AMZN. These were wonderful companies that were yielding much better returns with my married put plays… than they possibly could have with a short call attached.

That’s because if I had written a covered call, those stocks would have been whisked out of my account at a much smaller profit. Buying a put option for insurance gave me the confidence to sit on more speculative stocks… and when those stocks did take off, they showed me a much greater profit than if they were burdened with the obligation of a covered call play.

But my faithful blog followers were even more impressed with this fact: when I DID take a loss, it was down in the single digit zone. Even if the stock totally fell out of bed, we were looking at a paltry 5% or 6% loss rather than the dive that the stock took of 20% or 25%.

Cool.

Thank God for those early blog RATs (RadioActive Traders)! If my RATs hadn’t asked me to write a book, I might never have gone on to develop not one, but ELEVEN ways to pay for my put options.

How to Get the Best Value For Your Protective Put Options

Eleven ways to pay for the insurance policy that your put option provides: the RadioActive Trading Income Methods.That’s a post for another day. TODAY we are going to see how to get the best deal on those put options in the first place.

The turning point that took me from an options LOSER to a fairly big WINNER was this decision: instead of selling a call option to hedge my stock, I would buy a put option instead. The result was a play that didn’t limit my upside if I was right about the stock, but offered world-class protection in case I was wrong. But which put to buy?

Which Put Should I Get for The Best “Buy” on Stock Insurance?

Again, I simply referred back to the flawed strategy and behavior that got me into trouble in the first place, and reversing it to get the results I did want.

SOOO… the covered call “guru” I had been following said to sell front-month calls. This was because a call one month out might bring $1 of premium, while a call at the same strike price four months down the line would bring in $2 of premium.

The argument goes like this: “If you get a dollar for selling a call one month out, why accept .50 cents a month for four months? Get a dollar every month by selling it over and over.”

Makes sense… Sure, you might double your premium by selling a call further away in time. But you also dramatically reduce the amount you get paid per month. It’s almost always a higher per-month income when you sell calls that are closer to expiration, then lather-rinse-repeat 😉

But I was no longer in the call-sellin’ business… I was looking to buy put options for insurance.

Here’s the way cool revelation I had one day looking at the bill for my car insurance. There was a low, monthly payment price… a higher price to pay for six months of insurance… and an even higher price to pay for twelve months of insurance.

But if ya did the math (I did)… the six month premium was way less per month if you paid all at once… and the twelve month premium was way, WAY less. Per month, that is.

Heh… a light came on. If I was gonna pay to protect my stock, why not get me a policy that cost a whole lot less per month?

That one decision showed me (and the folks following my blog) how to protect stock in the most affordable way. Back then, I picked up put options that were as much as 26 months to expiration.

Nowadays I get into plays with a shorter duration, but they’re still lengthy as far as most of the married-put-trading world is concerned; a put option six to eight months out is not uncommon.

Here’s a RadioActive Trading setup I just ‘put’ together (10 October 2012, 1443 pm EST):

ACAS
Stock price:               $11.50
February $12 Put:     $ .1.10
Total Cost                 $12.60

The difference between the $12.60 to get into this trade, and the $12 that’s guaranteed back no matter what happens to ACAS, is .60 cents. That’s the real cost of my ‘insurance policy’… from mid-October to February expiration is four months, so .15 cents per month is all I’m putting up AT RISK.

ACAS Married Put: $1260 total investment, only $60 of which is AT RISK. Only .15 cents per share per month for a GREAT "Insurance Policy". 10/10/2012 1448 EST

This is ONE factor in the secret equation to really, REALLY minimize the cost of the put option: buy it far away in time. In the next post I’ll reveal the other part of the formula, the ‘secret sauce’ that makes for the wisest purchase of your protective put.

Til then,

Happy Trading!

Kurt

PS-> I should mention, AGAIN, that any trade I show here in this post, or in others on this blog… are meant for DEMONSTRATION purposes only, not a recommendation to buy, sell, or hold any security or option. But if ya did do the one I showed above, you max risk would be .60 cents per share for four months, or .15 cents per month. The upside, on the other hand, is unlimited.

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.