The “Secret” Tool I Use to Bulletproof a Stock

Okay Traders! YOU asked for it…

In my last post, Three Ways to Bulletproof a Stock, I showed three of the  ELEVEN “Income Methods” that we use to take income, reduce risk, or both in the context of a married put trade. If we take enough income, or reduce enough risk, it’s possible to end up with a situation in which we can no longer lose, but can continue to gain in case the stock keeps moving.

But you weren’t happy with just that ‘here is HOW to do it’ post…

Scores of you wrote in asking, “WHEN” do you know if it’s time to do one of these Bulletproofing moves to take income, reduce risk, or both.

I’ll tell ya what I use.

My secret weapon is PowerOptions.

Quick aside, everyone. I love PowerOptions because they are the best product of their kind on the market. BUT..! Per FTC regs, I’m required by law to inform you that if you click on the above link, subscribe to a no obligation,  no credit card needed FREE two-week trial…

…and if because of the value that you experience , you eventually make a decision to get a paid subscription… I will get a small commission.

That said, check ’em out. Here’s the free link again: Two Week Free Subscription, No Credit Card Needed

Okay, with the legal stuff out of the way, let’s see why I recommend PowerOptions as the BEST tool available for RadioActive Traders.

Special thanks to Mike Chupka for the below walk-through:

How to Identify ‘Bulletproofing’ Opportunities with PowerOptions

The following steps assume that you have found a candidate for trading using the PowerOptions “Search and Destroy” Married Put Search.

After entering the cost basis for your stock and the put option protecting it into the PowerOptions platform, you’ll be able to check in periodically for ideas. We’ll use the same SBUX example from March 1st, 2013 as in the Three Ways to Bulletproof Your Stock post.

Step 1: To view your open positions, click on the My Portfolio tab and then select Profit/Loss Portfolios.  This will show you your open positions.

PowerOptions Position Analysis Tools – Click to Enlarge

Step 2: Click the Edit / More Info. Button next to your position, select Position Actions and then Position Analysis.

The Position Analysis page is broken down into four sections:

  1. Original Position Values and Profit and Loss Chart – View the current values for your stock price, Break Even, current option bid, days to exp., Max Risk (monetary and percentage), P/L chart and quick links to further research.
  2. Position Values – Your original Position value, current liquidation gain/loss (includes all Income Method adjustments you’ve applied up to this point) and the future expiration value (value if the stock stayed at current price between now and expiration). Quick note: I almost never hold a position all the way to expiration. This is because you can often liquidate earlier for more. But it’s nice to know this information.
  3. Roll Out Opportunities – View the potential adjustments for your current position.
  4. History – see the current open positions and record of all closed positions and dividends you have entered.

Roll Out Opportunities –  Look Here to Bulletproof Your Stock

PowerOptions shows opportunities to reduce risk or even Bulletproof your Stock. Click to Enlarge

Along with the ideas for applying an Income Method, the new maximum risk you would have after doing the Income Method are shown for each position.

A “Max. Risk”  that’s negative is highlighted in red, means that this particular adjustment would Bulletproof the position!

Selling a covered call is one way to take income out of this married put position, but doing that would limit the potential payout. Since there are ELEVEN different ways to adjust this position favorably, let’s look at a couple that don’t limit the upside:

Looking at the Rollout Opportunities readout shows us a few Income Method #3 plays and several Income Method #4 plays will bulletproof the existing SBUX trade. If our goal is to eliminate all risk, while leaving the upside open for further growth, here are several alternatives.

Step 3: It’s great to know the figures. But most of us want to see the ‘big picture” – literally.

For further insight, click the blue “More Info” button next to the potential Income Method. Select ‘Simulate Trade’.

Weigh the Before/After BEFORE Doing your Income Method

From 5.5% AT RISK to a negative risk; no matter what happens to SBUX price you cannot lose… Upside is still wide open.

By doing Income Method #4, Rolling the Put, we’ll reduce the risk inherent in this married put trade from 5.5% to a negative 1.8%. That means that there’s no way to lose your capital any more; you are BULLETPROOF.

However..! It’s still possible to gain more if SBUX continues its skyward climb.

Now, it’s important to understand a little something here… The analysis on the left says that there’s a liquidation value right now of 6.6%. That means if we simply end the position right now, we take in a profit or 6.6%.

Then we look at the negative risk on the right… -1.8%… and think that we have swapped our guaranteed 6.6% gain for a paltry 1.8% gain.

That isn’t correct. Our liquidation price after doing Income Method #4 remains at just about 6.6% after doing this move.

And the upside is still open. It’s just that if SBUX totally tanks from here, we still can get out with that guaranteed 1.8% gain. NICE.

A Picture is Worth a Thousand Words

Left image is original position, right image is situation after "Bulletproofing". There is no longer any break even line. The new position still has a "today" liquidation value of about 6.6% but cannot lose capital if you hold on for even greater returns

Notice anything missing from the graph on the right?
That’s right… no more break-even.
Meaning that you can’t lose any more.
NICE.
The biggest revelation for former spread traders and ‘reformed’ covered call players 😉 that have come over to RadioActive Trading has always been these ideas of:
1) beginning with limited risk, but then…
2) GRADUATING from limited risk to ZERO risk in a particular play.
Afterwards it’s possible to capture premium a number of times before completely letting this stock and put position go at a profit.

Where Do We Go From Here?

Now that we know it’s possible to eliminate risk… possibly make our stock BULLETPROOF… and leave our upside open… whadda we DO with that information?

First off, I’d go and pick up that PowerOptions free two-week trial subscription.

Next, if ya didn’t see Three Ways to Bulletproof a Stock, go lookit that post as well.

Also… for a teaser about how to continue risklessly extracting income from a position like this, check out this post: “What On Earth is a Nested Spread Trade?”

Finally! On Tuesday and Thursday we do a free webinar on these and other Bulletproofing methods. Register at RadioActive Trading, or write me at Kurt at radioactivetrading dot com. We’ll getcha taken care of.

See you out there, Traders! 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.