Maximizing Growth & Return in Risk-Averse RadioActive Trades

Investors in the RadioActive Trading methodology are sometimes concerned about the cost of the put option in a married put position for insurance.  They would prefer the higher returns possible when the put option is not in place.  But the peace of mind and security of limited risk cannot be easily replaced.  Insurance is a necessary precaution for high value assets like your home, your car, AND your stock portfolios.  However, there are ways to minimize the cost of put option insurance by making a prudent risk/reward choice when you first establish the position to enable maximum returns.

The request to seek higher returns is very understandable when one considers that we are in and have been in a bull market over the last few years.  Anyone that owns stock or mutual funds is up double digits in asset value.  Most personal portfolios are up 25% and the averages are hitting new highs as I write this article.  Everyone wants to participate and get their share of the stock market profits.

Market prices and expectations are driven by two primordial forces, greed and fear.  When the market is hitting new highs, as it has been, the dominant force is greed.  Greed encourages investors to be more speculative and seek higher returns.

The RadioActive methodology is easier to embrace and gets more support during times of fear.  When the market has been declining and there is a fear of loss, investors are more open to protective strategies and the concept of stock insurance or portfolio insurance.  In general, this is not a time of fear, we are at the top of the investment cycle and in a time of greed.

So over the short-term investors are understandably being driven by greed.  However, in probing the conversation with our RadioActive subscribers there seems to be divergent theme emerging.  Although investors want higher returns many will position the put protection 20-30% ITM for very low 2-3% risks.  It is very difficult to take such little risk and yet expect to make higher returns (some want their cake and eat it too).

The next observation is that some RadioActive subscribers will invest in very large companies that have sales and earnings growth of 7-9% or less and yet have the expectation to earn 15% with put protection.  Companies that grow at 7% will have stock that grows at 7%.  Sure the stock may vary much more due to systemic events like the financial crisis, wars, and Fed intervention, but over the long term a company’s stock growth is limited by their growth in sales and earnings.  To expect these companies to earn 15% with insurance is wishful thinking and not investing.

The path to higher returns using the RadioActive Trading Methodology during a bull market has 2 components, which are discussed in the BluePrint:

1. Position the put in the higher ranges of the 6-9% risk guideline during rising markets.
2. Buy stocks that are growing at rates comparable to your goals and expectations.

A practical way to implement this positioning can best be show by example:

If your goals are to grow your investment by 15% per year, then we would look for companies that are growing top line sales at and bottom line earnings at greater than 15% per year.  We would position the put one year out in time with a strike price ITM with an 8-9% risk.  Ideally this risk level should be achieved by going less that 15% ITM with the put.

Not every stock will meet these criteria.  Recently we reviewed a portfolio that contained a cyclical stock that met the potential growth and had a risk of 8%, but the put strike price had to be 30% ITM.  This stock was not a good candidate for the RadioActive Trading Methodology, but there are many stocks that will meet these conditions and can be easily found using the RPM Report on the Fusion Subscription Site.

On 7/22/2013 we used the Fusion RPM Report and found EVR, which had an expected growth rate of 26%.  We added EVR @ $42.84 to our portfolio (Ernie@PowerOpt in the Fusion subscription service).  There were several put choices to consider:

7/22/2013 EVR @ $42.84

The last choice with a Max Risk of 2.6% would be the most safe and conservative choice.  It would require the stock to advance 28% (ITM) before the strike price could be exceeded by March.  This positioning would be safe, but not likely to provide much in capital gains or return.  We chose the March 45 put, which had an 8.2% risk with a greater probability of getting capital gains and an earlier opportunity to write call options.  The 5 line set-up looked like this:

To summarize, for greater gains in a bull market take a little more risk (1) and (2) look for stocks with greater growth prospects.  EVR is expected to grow at 26% over the next few years.  To review the EVR case, which is still open, log on to your Fusion account.  This position is now bulletproof and still has 6 months for additional income opportunities.