When should I consider trading an Income Method?

If you follow the rules in The Blueprint / Home Study Kit, you might want to start looking for an income method (one of the bullish income methods) if the stock rises 5% or so after you enter the position. Is this always the best time? Not necessarily, it depends on the stock, the premiums available and how deep ITM your put was to begin with.

Here’s the question and context from a RadioActive Trader…

I just wanted to confirm something that I heard on one of the radioactive trading seminars when determining to do an income method. That is when is it considered a good time to do so? I know it has to be when the stock is above the strike price of the put. But I also heard that that we are looking at the percentage return on the income methods we make too that determine whether we get it or not.

​I have been finding that the premiums are not that high at the moment. They are quite small for months. Is there any kind of filter that I can put in power options that can show good premium? I used to do collars but I found myself stressed and constantly looking at the charts hoping I wouldn’t get assigned like you said on positions that didn’t go my way. So I like the radio active trading method better.

Here’s the answer and context…

For sake of argument, let’s say we opened a Married Put such as:

Now, after we open the RPM the stock moves up 5% to $105.00.

If I am evaluating IM #1, I am looking to sell a one month out $115 or $120 call option. However, with the stock at $105.00 I may only be able to get $1.00 premium for the 115 call and maybe $0.60 for the 120 call.

Following the other rules for IM #1, this call would not reduce my at risk amount by the suggested 1/3rd of the initial at risk. I may want to wait for the stock to be trading at $110 or $112 before looking to sell the $115 call.

The stock has moved up by 5%, but I still want to make sure that the potential income method I am evaluating matches the other guidelines and rules of thumb discussed in The Blueprint and HSK.

You have the Foundations of RadioActive Trading CD included with your Blueprint. In that video CD, Kurt discusses the 3 Core Principles of RadioActive Trading. One of those 3 principles is the ATM Bell Curve: We want to sell premium at the height of the curve and buy options that are OTM and ITM, lower on the curve. This applies not only to the RPM setup but also to the application of the various income methods.

With that in mind, the best time to typically apply an income method is when the stock is trading right at your protective put strike price. Whether you are adjusting the put or using one of the riskless spread trades, when the stock is trading at the put strike price the put will essentially have the highest time value, and the ATM calls (115 calls in this case) will also have a heightened time value.

When you are evaluating an income method you want to make sure that it fits all of the guidelines discussed in The Blueprint and that you are not applying an income method just for the sake of applying an income method.

Regarding PowerOptions, there is not a filter that in the Married Put search tool that allows you to look for premium while evaluating an initial RPM. That being said, once you have identified a potential RPM position, you could use the More Info. button and link to the Option Chain. Once you have opened the chain, change the chain view to 5 Strike Call Chain to view and evaluate the call option premiums that are one month out in time. This might give you some guidance as to what you might expect future call premiums to be going forward.