Mornin’, Traders!
At least it’s still morning here in Colorado Springs. I’m writing to let you know the status of a “RadioActive Profit Machine” assembled back on October 10 and referred to on this blog. More importantly, we’re going to compare this play to a covered call play… and see how well we would have done if we had sold a covered call instead.
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Okay, so the RadioActive Profit Machine in question comes from my October 10 2012 post wheren I picked up shares of ACAS at $11.50 per share, plus a February 2013 $12 put option for $1.10.
That makes a total of $12.60 spent for an asset that’s guaranteed to be worth at least $12 for four months… so the difference of .60 cents is all that was AT RISK.
That’s like spending .15 cents per month for ‘stock insurance’. 😉
Today is Expiration Friday. I just got informed by a phone alert that ACAS hit a 52 week high… again… and I may now cash in my shares at $13.85.
Think I’ll do that.
Now let’s count up the profits: My stock has gone from $11.50 to $13.85. Happy day. That makes $2.35 profit, very yummy.
Of course, the $1.10 expense for the put option has to come off that… so only $1.25 profit. Not as cool, but I’ll take it.
Dividing $1.25 profit by the total initial investment of $12.60 yields a very respectable return of 9.92% for about a four month holding period. Not shabby.
Covered Calls VS. Married Puts: Comparing ALL Facets
Let’s visit October 10, 2012 again and see what might have happened if we had sold a covered call to hedge the stock, instead of buying a put option.
When I picked up ACAS in the middle of the day it was trading at $11.50. But the end-of day data shows it at $11.69, and the February 2013 $12 calls are trading at .61 cents X .65 cents. By getting ‘in the spread’, I might’ve sold a call for .63 cents.
Question: How much downside protection does the covered call give me? Answer: the .63 cents I collect from selling a call. That’s all I can count on keeping… if ACAS up and pulls an Enron, I’m out the $11.50 I spent for the stock, but at least I get to keep this .63 cents 🙁
SO for the next 129 days til November expiry, the only money I can count on keeping of my $11.50 invested… is the .63 cents I’ve collected. Contrast that with the $12.00 I can be certain I’ll keep of my investment of $12.60, using the married put play.
Seems like the married put is quite a bit safer. But does it perform as well?
Let’s see…
Covered Call Kicks Butt!
If I had done ACAS as a covered call trade, I would by this point have spent $11.50 on the stock and taken .63 cents of premium. Letting the stock be assigned guarantees me the .50 cents capital gain plus the .63 cents captured premium for a total of $1.13 profit!
Oh, Wait. I mean… the Covered Call DISAPPOINTS…
You know, $1.13 back on an $11.50 investment is 9.82% return. That’s pretty solid performance on a four month investment. But I just documented above that where the return on my $12.60 investment, over the same time period, was 9.92%.
Hmmm. More percent return on more money. Seems like the married put wins again… a better hedge (protected $12.00 out of $12.60, or 95.2% of the investment) ALSO produced a better return!
Married put wins again. No surprises here.
Traders, I would looooove for you to put in your input here now… praise is fine but criticism is MORE than welcome. Would love to hear from you about what you think of this comparison. Just plus in your comments below.
Okay Traders! Till I see you again,
Happy Trading!
I'm Kurt Frankenberg, and I have discovered how to truly put the odds on the side on the individual investor.
Do I buy a put which is next strike in the money or 2 strike in the money? Which is best? Ie if stock is 50 do I buy put 52.5 or 55 ?
The put you choose is based on the max risk that you are willing to take! We generally suggest 4% to 9% as the max risk. Also, we are buying more time value than some since time is cheaper when you buy it up-front. Come to one of our free webinars and you will learn the basics of WHAT we do and WHY we do it. Free Live Webinars
It depends. I pick a put option that gives me 1) less than 6%-8% risk in the net position and 2) a more than reasonable time for the price to develop, say 6-8 months. My PowerOptions account helps me find those candidates in seconds. Here’s a free two week test-drive, no credit card needed: http://www.poweropt.com/rat.
Thanks for the Q! Happy Trading,
K
Interesting to see some guy at Collective having traded a married put portfolio for some time now.
http://www.collective2.com/cgi-perl/system49592384
Unfortunately shows in stark relief the downside of this strategy
Any comments?
The way I read this reference, they hypothetically show what trades might have occurred. It doesn’t look like anyone is actually trading that.
Not clear if there are other income generation or risk reducing trades that go on for the life of the put options. In fact, I didn’t see how long the put insurance was even in place.
Also, I’m not sure that ETFs are the best equity vehicle for a married put strategy. Furthermore, using a max risk or limited downside at 10% is probably too high, unless you can find underlying’s that will go up 20 to 30% in the next 9 months.
Our track records show different results. Any track record is bound to be different based on the underlying’s chosen and the timing and the performance of income methods/risk reduction adjustments.
Kurt, Re: Ratio Spreads. If you bought the stock and insurance, could you not just as easily sol 5 calls and bought 4 calls and increased your income to become bullet proof sooner?
Maybe. Good observation. You’re tinkering around with what I call “The Money Net”, or Income Method #5.