What about the 12% gain Kurt realized on ALTR after we showed a profit of only $0.05?
The -$0.05 guaranteed profit, or bulletproof status, meant that even if ALTR dropped to $1.00 per share he was still guaranteed to make $0.05, even though his cost basis was $29.95 getting into the position.
This Delta RPM has a similar risk-reward profile to the ALTR trade.
Here was his original setup for the ALTR position:
SEP 14, 2010
| Buy shares of ALTR @ | $27.35 | |
| Buy 1 2011 MAR 29 put @ | $ 3.50 | |
| Total Invested = | $30.85 | |
| Guaranteed Exit = | -$29.00 | |
| Maximum Risk = | $ 1.85 | or 6.0% |
A few weeks later, Kurt performed Income Method #3:
Cost Basis of RPM = $30.85
Sell to Close MAR 29 put @ -$2.52
Buy to Open NOV 30 put @ $1.62
Net Credit from IM #3 = -$0.90
New Cost Basis = $30.85 – $0.90 = $29.95
New Guaranteed Exit = -$30.00
New Max Risk = -$ 0.05, or -0.2%
This RPM is now BULLETPROOF. Similar to the ALTR position.
As you can see from the image, the ALTR position (shown as using Delta with the same numbers in the current market) has no chance for loss. The 30 strike put option guarantees that we are going to get a minimum of $30.00 back for the position. Since the cost basis is lowered to $29.95, we are guaranteed to make $0.05 even if the stock drops to $1.00 per share.
But…we have not sold a call to cap the upside. We will make $0.05 in the worst case scenario, but still have an unlimited upside profit potential. Kurt did this move prior to the earnings event. If ALTR hadd positive earnings and the stock gapped up in price, he could earn much more than $0.05, or 0.2%. And that is what happened:
11/5/2010: ALTR Gaps up to $33.10. Liquidate RPM
Sell to close ALTR stock at $33.10
NOV 30 put @ $ 0.00
(Kurt held the put and let it expire on 11/19)
Liquidation Value = $33.10
Adjusted Cost Basis = -$29.95
Total Gain on ALTR = $ 3.15, or a 10.5% return from the total cost into the position of $29.95.
Kurt also made an additional $0.70 on the RPM using an IM #5 trade in October that increased the total profit to $3.85 / $29.95 = 12.8% return.
The $0.05 guaranteed profit was the worst case scenario. Kurt still had unlimited upside. The more important thing than the return in this case was the fact that Kurt entered into an earnings event knowing he could not lose…but still had the advantage of upside profit potential. Heads you win, tails you don’t lose!
I'm Kurt Frankenberg, and I have discovered how to truly put the odds on the side on the individual investor.
how can one subscribe to your services? how much is it?
Hi Jules: The Fusion service on RadioActiveTrading.com is $69 per month – teaches and supports the trading methodology that we teach in The Blueprint. If you are more advanced, consider a subscription to PowerOptions – these tools will help you find our style of trading and then manage it once you are in a position.
Can we purchase the custom spread builder with graph software?
Thanks
Jim
James, you subscribe to that service.
Above you say:
“A few weeks later, Kurt performed Income Method #3:
Cost Basis of RPM = $30.85
Sell to Close MAR 29 put @ -$2.52
Buy to Open NOV 30 put @ $1.62
Net Credit from IM #3 = -$0.90”
My Question: How is it possible for the MAR 29 put to be priced higher than the NOV 30 put when the MAR 29 put has less time value and the strike is lower?