Three Ways to Bulletproof a Stock

Today’s post seems like a HUGE one… but it’s actually three small yummy bite-sized pieces. We’re gonna reveal to you three ways to BULLETPROOF a stock!

Folks, I want to point you out to the best info here on this blog and also on YouTube and other resources. So click on the little ‘rabbit trails’ I’ve posted here for you whenever a cool principle or technique strikes your fancy.

In this RadioActive Trading Blog post, I take a simple RadioActive Profit Machine (a highly specialized married put play) and show not one, not two, but THREE ways… to bulletproof a stock, receive a little income, while leaving our upside open for further growth.

With the RadioActive Profit Machine (RPM), that’s never been more true. Now that we have TWELVE “Income Methods”, there are more ways than ever to take income… reduce risk… or BOTH.

In today’s post I’m going to show how you might use three different RadioActive Trading Income Methods to bulletproof a stock. To get to that wonderful promised land, in which the stock you own can no longer hurt you if it goes down… but can continue to win if’n it decides to go up some more.

Let’s hop to it:

The RadioActive Profit Machine SETUP

All RPMs start out the same way: with a stock protected by a far-out, in-the-money put option. That means that the strike price of your put is higher than the actual, present price of the stock. Take a look…

Mar 1, 2013

1) Shares of SBUX                    $54.87
2) Sept 2013 $57.5 put          +$  5.95
3) Combined Investment         $60.82
4) Guaranteed Back                –$57.50
5) Total Amount AT RISK         $  3.32 or 5.45%

The above stock-plus-put setup risks less than six percent, but has an unlimited upside potential. That’s where all RadioActive Profit Machines (RPMs) begin; they have a small amount of risk (though it’s less than straight-up owning the stock without protection), but they have unlimited growth potential.

The RadioActive Profit Machine. Heads you Win… Tails? You Don’t Lose Much.

Other posts on this blog about married puts:

Revolutionary “NEW” Technique Turns Your Trading Right-Side-Up
A Married Put Beats a Covered Call THREE Ways

Bulletproofing 101

So after limiting risk, how do we go the next step and bulletproof a stock?

Within the context of this “RPM” (longer term married put play), now we can do ‘nested’ trades… near-term, smaller plays that capture income… while still leaving the upside open for continued growth in the future.

How

When the amount of income you’ve captured EXCEEDS the “AT RISK” amount from line 5) above, then the cost basis of the stock plus put is LOWER than the strike price of the put.

In other words, you’ve effectively paid less for your RPM than you’re guaranteed to get out of it.

Heads you win, tails you can’t lose 😎

Other posts about Bulletproofing a stock on this blog:

This Simple Trick Made My Stock BULLETPROOF
Bulletproofing a Married Put Trade

There are twelve documented Income Methods in the RadioActive Trading manual, The Blueprint. I’ll show three of them here:

Bulletproof a Stock with Income Method #1: a Short Call

Remember we put this example RPM together on Mar 1, right? With less than 6% AT RISK we can just let ‘er sit for a while.

One week later on March 8  SBUX is up from our $54.87 buy-in, all the way to $58.67 a share.

At this point, the April 2013 $57.50 calls are bidding at $2.32. How ’bout we sell one to generate a little income?

Here’s the risk/reward picture of our stock-plus-long-term-put position, AFTER selling a near term covered call:

On Expiration Friday April 19, SBUX is at $58.41. The short calls mean that we have to deliver SBUX at $57.50. The October 2013 puts are still worth $3.65 , so we take in:

Income From Short $57.50 calls $   2.32
Starbucks Stock                              $ 57.50
Sell October Puts                         + $   3.65

Total back from $60.82 invested: $ 63.47

That’s a ($63.47 – $60.82 = ) $2.65 per share profit (4.35%).

OR..!

Alternative to Taking a Profit: Manage the Short Call and Keep Stock

We might also close the April $57.50 call for .93 cents and look for a chance to do Income Method #1 again. We captured $2.32, then spent .93 cents to keep the stock. That’s a net of $1.39 taken off of the cost basis of the stock. This brings us nearly halfway to “Bulletproof”.

Selling a call, then buying it back at expiry generates $1.39, reducing the cost basis of the stock to $53.48 .

 

With the obligation to deliver SBUX at $57.50 removed, the graph looks like a
<=== hockey stick again, but with less risk:

New Hockey-stick Graph shows lowered Risk after Income Method Number One

 

 

 

 

 

 

 

 

 

 

 

 

On April 25, opportunity strikes again when SBUX opens at $60 a share and starts going up from there! Selling a May 2013 $60 call for $2.05 at this point takes us into the Bulletproof zone, while raising the possible payout:

“Bulletproof” Trade. 2nd Income Method #1 play guarantees a return, we just dunno HOW much til May Expiry.

Lemme bring your attention to a sweet li’l something… in the above chart, there is a small, negative amount AT RISK. Negative risk means “Bulletproof”; this trade can win big (up to 9%) but what it can’t do anymore is lose.

NICE.

Other posts on this blog about Income Method #1:

How NOT To Trade Income Method #1, Selling a Covered Call

Bulletproof a Stock, Method #4: The “ATM Machine”

Income Method #1, shorting a call for income, has the nasty side effect of capping the upside potential of our stock. For our second bulletproofing technique, I’ll take the same SBUX RadioActive Profit Machine  and capture the movement of the stock without shorting a call. This leaves the upside open all the time.

We’ll use the March 1 setup from above with 5.5% AT RISK. By March 8, SBUX stock has gone up from  $54.87 to $58.67 a share.

The price of the stock has gone above the strike price of our October 2013 $57.50 put option. Here’s the “ATM Machine” play:

New Hockey-stick Graph shows risk lowered from 5.5% to 3.4%

Sell to Close October $57.50 put $3.90
Buy to Open October $60 put       -$5.20
Total DEBIT                                       $1.30

At first blush this appears to be not income, but outgo. We’re spending ($5.20 – $3.90) = $1.30!

Ahh, yes. BUT..! That $1.30 invested by rolling this put up, guarantees us a $2.50 higher exit price. Not shabby.

On April 25, SBUX went to $60.50. With the October $60 put now being out of the money again, we have the same kind of opportunity again:

Sell to Close October $60 put   $3.85
Buy to Open October $65 put   -$6.85
Total DEBIT                                   $3.00

Yeah, we’re spending ($6.85 – $3.85 = ) $3.00 bucks. But again, it’s to guarantee a $5.00 higher payout. Three for five is a good trade. Lookit the outcome; we’re “Bulletproof” again! Unlimited upside with no downside risk:

After 2nd Income Method #4 application BULLETPROOF, still unlimited upside potential.

I should mention something here about the growing gap between the red and blue lines in the PowerOptions Risk/Reward Graph. The Blue line represents return at expiration. The Red line shows stock plus the faaaat premium represented by the time left to expiration. This particular Red line is the stock plus put’s value at 7/29 or sooner. So the payout can be very big in this case, like my friend Mike Chupka that closed an Income Method #4 play for a 59.8% return after bulletproofing.

Again, NICE.

Other posts on this blog about Income Method #4:

Bulletproofing a Married Put Trade

Bulletproof a Stock with Income Method #6: The Bear Call Spread

Here’s a sweet little darlin’ I like to use to reduce the cost basis of stock, over and over and over again… until all risk disappears.

A “Bear Call Spread” is formed when you sell to open a call contract at a low strike price, then use some of the proceeds to buy to open a contract at a higher strike price. The result? You get a small premium.

NORMALLY, there’s a risk associated with that premium because most folks doing a Bear Call Spread don’t actually have the stock on hand; they may end up with the unfortunate obligation to deliver shares of  stock at the lower price. To satisfy the obligation they buy stock at the higher price, creating a loss.

BUT..! Get this: Income Method #6 is truly a riskless spread trade because we do the Bear Call Spread within the context of owning the stock.

The Bear Call Spread, applied according to the rules in The Blueprint, captures premium but cannot come back and bite you… because the stock you may be called on to deliver is already in your account. One of the rules is to capture one-half of the width of the spread or more. For example,  selling a $57.50/$60 spread, you’ll want to capture $1.25 or more.

With repeated, income-grabbing applications of Income Method #6, SBUX could become Bulletproof.

We’ll use the same March 1 RPM setup as above. On March 8 a limit order yields:

Sell to Open March $57.5 call    $1.40
Buy to Open March $60 call      –$0.15
Total Credit                                    $1.25

So $1.25 gets taken off the cost basis of the stock. We have limited risk, but unlimited upside like so:

All four legs are represented; 100 shares stock, 1 October put, 1 short April $57.50 call, 1 long $60 call. Note that if the Bear Call Spread goes against, the net result is still profitable.

A ‘Riskless’ Spread Trade

This is a truly unique play; I’ve never seen anything like it. The premise is that doing a Bear Call normally introduces risk, but that risk comes from taking on an obligation to deliver something you don’t have. When you do the Bear Call Spread… but you already own the underlying stock, there is no loss from getting assigned. Furthermore, you own a long call that increases in value as the stock continues up..!

 

Management: To Keep the Stock, We May Need to Buy To Close the  Short Calls

On Expiration Friday, March SBUX ended up at $57.66. To close the obligation to sell SBUX only takes .16 cents and we still have the October Puts in place. The longer term October put option still protects SBUX so we’ve got a RadioActive Profit Machine (RPM) again with less AT RISK. This is because the cost basis was lowered by ($1.25 premium captured – $0.16 cents ‘management’) $1.09 per share:

Risk reduced after capturing $1.09 credit from Income Method #6

Lather, Rinse, Repeat

After employing Income Method #6: The Bear Call Spread once, we wait until another opportunity to capture $1.25 or more presents itself.

We don’t have to wait long! On April 12,

Sell to Open April $57.5 call    $1.74
Buy to Open April $60 call      -$0.28
Total Credit                                 $1.46

Same kind of setup; Income taken from the Bear Call Spread but it can’t come back and haunt us

A week later when these calls expire, SBUX is above $57.50 so again we have to spend a little to hang on to the stock. The short $57.50 call is closed for .93 cents. So again the captured premium of  ($1.46 – $0.93) = .53 cents is applied against the cost basis of the stock:

.53 cents more is taken from cost basis of stock; October puts still in place

Third Time’s A Charm!

All that remains is to watch forthe opportunity to sell the MAY $57.50/$60 Bear Call Spread to grab $1.25 or more premium.

Voila! On April 23:

Sell to Open May $57.5 call    $2.77
Buy to Open May $60 call      -$1.37
Total Credit                                $1.40

With risk reduced to $1.70 per share, the third Bear Call Spread captures another $1.40. We are .30 cents from bulletproof already

Happy, happy day. By this point we have collected premiums from Bear Call Spread plays totaling ($1.25 + $1.46 + $1.40 ) = $4.11. We’ve spent ‘management’ costs to keep our SBUX stock of ($0.16 + $0.93) = $1.09. That’s ($4.11 – $1.09 = $3.02 of our $3.32 AT RISK cancelled.

Not bulletproof yet… there is technically still .30 cents per share AT RISK… but you can see where this is headed, right? 😉

A Final Word about Bulletproofing: Being in Position to Catch BIG Winners

Someone might say, “Well, shucks! That repeated Income Method #6 dealie looks like an awful LOT of work.”

Is it really, though? What wouldn’t many of us give to have complete peace of mind during uncertain markets, or right around an earnings announcement?

Also, the unlimited upside potential in these plays is a HUGE factor determining your long-term success. I don’t promise that stuff like this will happen every time, but here’s an example of the sort of thing that can happen when you are Bulletproof:

Almost COMICAL Profits: My Marvel Bulletproof Story

I was long on Marvel Comics (symbol used to be MVL) when Disney (DIS) announced that they were buying Marvel for $4.4 Billion.

My MVL shares, which were Bulletproof at the time, shot through the roof! I had used Income Method #6 to take a riskless credit of $1.05 per share on MVL, but then ended up taking a 30.2% gain on what I had spent on the stock and put combined.

I don’t know if I would have had the nerve to stay in a volatile stock like MVL was if it wasn’t for Bulletproofing…  But sure am glad I had used the RadioActive Trading principles of The Blueprint in order to trade fearlessly, capturing premiums, while leaving the upside open.

Other posts on this blog featuring Income Method #6:

Taking Credit Where It’s Due
Bulletproof THIS, Part Deux
I Got GOOGLE Slapped For Saying This

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…
What on Earth Is a Nested Spread Trade?
Options Trading Wisdom From The Art of War

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.