The Riskless Spread Trade that Pays You TWICE

Today’s Post: 1150 gluten-free low calorie words… Plus lots of pictures 🙂 . Take ya four minutes to read.
But WHY? Easy …because YOU want to know how to do a riskless spread trade… that pays you twice.

From RadioActive Trading: The “Money Net” Play

Hey there Traders!

Today I’ll be sharing with you how my buddy Mike Chupka of PowerOptions was able to open a play at a $0.40 credit… CLOSE it a few short weeks later for a SECOND, much higher credit… and do this special form of spread trade without risking a dime.

"Secret" Technique to Eliminate Risk from a Ratio Call Spread... a Spread Trade that Can Pay You TWICE!

“Secret” Technique to Eliminate Risk from a Ratio Call Spread… a Spread Trade that Can Pay You TWICE!

Not shab-bay. 😉

First, before you hang up the phone (wait, does this site even do mobile?) I’d like to show you how Mike got the first and second payout. THEN I’ll show you how it was indeed done with zero risk.

Shall we?

The Ratio Call Spread: Get Paid TWICE for One Position

On April 21st this year, Avis Budget Rental Group (CAR) was trading around $53 a share. Mike saw that he could get a net credit of .40 cents for buying one, then selling TWO calls with a May expiration.

Let’s go to the drawing board…

The "Money Net" trade is a Ratio Call Spread Opened at a Credit

The “Money Net” trade is a Ratio Call Spread Opened at a Credit. Click Here to Embiggen…

Now, normally taking a .40 cent premium on any credit spread (e.g. Bull Put Spread, Bear Call Spread) means a high probability of being able to keep the premium. BUT..! There’s still a pesky chance (normally) that the spread may BACKFIRE on you and end up costing you money in the end.

In a moment I’ll show you why Mike had NO reason to fear this. Doing this spread, or any spread trade normally involves capital risk… but the way this play was structured there was no way Mike was gonna lose anything as a result of this play.

I’ll get to that. FIRST, let’s see how Mike was able to get paid twice for one credit spread:

On Expiration Friday in May, CAR is Trading Around $54.90 During the Day…

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Again, not shabby at all. Mike was paid .40 on the front end, then 2.05 later when he closed the trade here on Expiration Friday.

81.48% MORE Premium Than a Covered Call!

No dip. Sounds too good to be true… so I guess it makes sense to show the black-and-white numbers on that. 81% higher premium is nothing to sneeze at, IF it’s true.

So let’s see. On April 21st above, Mike did the “Money Net”, or Ratio Call Spread play by buying one, selling TWO calls at a .40 credit. He later closed it for a second $2.05 credit by buying to close the short calls and cashing in his long call. Net Credit: $2.45

If Mike had only sold a covered call, that would be $1.50 credit on the front end, minus .15 cents later to keep the stock. That’s $1.35.

$2.45 is 81.48% higher premium than $1.35.

Woo hooo!

So now you see how Mike was able to get paid TWICE for one play, and get paid quite handsomely. Great job Mike!

Nice. But Is This Really a RISKLESS Spread Trade?

Yes.

As promised, now I’ll also show how Mike was able to do the Ratio Call Spread WITHOUT the worry that normally goes with it.

Normally, by selling two calls and buying one, we create a situation that looks like this:

The (Normally) Treacherous Ratio Call Spread Risk/Reward Graph

The Ratio Call Spread Normally Carries INFINITE Upside Risk. FOrtunately, There Is a Way to Eliminate ALL the Risk

The Ratio Call Spread Normally Carries INFINITE Upside Risk. Fortunately, There Is a Way to Eliminate ALL the Risk

The reason for that unlimited risk to the upside is that one of those short calls is “naked”, or uncovered by stock.

Having a "Naked" Call Gives You Unlimited Risk to the Upside... Normally.

Having a “Naked” Call Gives You Unlimited Risk to the Upside… Normally.

I used to work in an emergency room. There I learned that MOST folks shouldn’t be naked 😉
-Kurt Frankenberg

If the stock goes up a lot, we have an obligation to deliver shares at $55, but may have to buy them at a much higher price (wait… didn’t that one guy tip me to buy low, sell high?) Hmmm…

At first blush, the Ratio Call Spread play looks like the riskiest of propositions.

Sure, having a “naked” call is risky. But what if this play was done in the context of owning the underlying stock?

Then for all intents and purposes we wouldn’t have a Ratio Call Spread anymore; it would be more like a Bull Call Spread (one long call at the $52.50, one short call at the $55 strike), accompanied by a Covered Call at the $55 strike.

Oh, and all done at a credit.

THEN what is the upside risk for the Ratio Call Spread?

When you own the stock, it’s…

When You Do a Ratio Call Spread on a Stock That You Already Own at a Low Cost Basis... NO Capital Risk is Introduced But You DO Take a Credit

When You Do a Ratio Call Spread on a Stock That You Already Own at a Low Cost Basis… NO Capital Risk is Introduced But You DO Take a Credit

Zilch, zero, nix.

Nada thing.

Because when you have  the stock on hand to deliver, you needn’t go out on the open market and buy shares high, just to sell ’em low.

So you can see that doing the Ratio Call Spread (or as I like to call it,  “Money Net”) adds no capital risk to Mike’s account:

  • He gets paid .40 cents for putting it in place;
  • He may get paid again if his underlying stock closes in a wide range;
  • He cannot get hurt by the normal consequences if his stock goes up!

Wait! …It Gets (Even) Better

Not only did Mike’s play here net him a tasty double-dip of premium… it also put him in position to BULLETPROOF his stock.

Because I know what you are thinking: “Sure, doing the Ratio Call Spread in the context of owning the stock introduced zero capital risk. But owning the stock in the first place sure had some risk to it!

Heh… s’okay.

Because Mike had in place another play that limited his risk down to 6.7%, NO MATTER WHAT HAPPENED to his stock. That’s better than the stop orders some people use.

Plus, AFTER collecting the total of $2.45 premium from the Ratio Call Spread play detailed in this post… Mike ended up with even less risk.

Mike still happens to own CAR. But by using the RadioActive Trading Income Methods he has now erased all his risk of ownership, clear out to January of 2015. We call this phenomenon Bulletproofing.

…but that’s a topic for another post.

Who Else Wants to Learn to Do Riskless Spread Trades?

Kurt Frankenberg, the "Champion of Married Puts"

Kurt Frankenberg, the “Champion of Married Puts”

Hey there, Good Lookin’!  You just read how to do one type of Riskless Spread trade…but here at RadioActive Trading there are many more ways to apply riskless spread trades in the proper context!

In our Stop Losing at Credit Spreads Forever video, you will see SEVEN killer techniques for taking income from the market beginning with super-low risk (for the structure), NO risk for the spread plays, and ending with ZERO risk for either.

If you’re sick and tired of losing the spread trading game, taking small wins 80% of the time but then giving back all your profits in one silly miscalculation or sudden move against, and you’d rather see your earnings compound and grow and if you are ever wrong… THAT’S COMPLETELY POSSIBLE if you use the content of this VIDEO and you have structured yourself wisely with this no capital loss plan.

CLICK HERE to pick up your copy of Stop Losing at Credit Spreads Forever!

The Riskless that Pays YOU Twice Video

The Riskless that Pays YOU Twice Video

Can you think of another Trader that might enjoy this article? Did you get an interesting enough thought out of it that you’d like to make sure not to miss any others? Share or Subscribe now.

Also, I’d LOVE to hear your thoughts about this riskless Ratio Call Spread of Mike’s, so post ’em in the comments!

Til then, 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.