How A RadioActive Trade Can Go Bad

The other day I received a phone call from an investor interested in RadioActive Trading and the methods we use to reduce risk and let profits run. He looked at our trading results in the Fusion subscription track-record and saw my Silver Wheaton Corp. (SLW) trade at the top of the list with a projected loss at expiration of -26.7%. He was surprised and asked how a loss like this is possible when we claim that using the RadioActive Trading method would limit losses to single digits (under 10%). Then he went even further, “If one of the authors of the BluePrint can’t control their losses, there must be a problem with the methodology”.

Wow, I was taken back. I explained to him that this trade was a result of personal choices I made, which may not have worked out, but the RadioActive Trading methodology was sound. The SLW position status was the result of my personal decisions that went bad. My caller terminated the conservation shortly without really understanding the facts and this important lesson about trading rules and our natural tendency to let our judgment interfere. This article will outline the facts and make clear that the RadioActive Trading Methodology is very much intact.

Remember when you were a kid? Our parents set up some simple and clear rules about crossing the street. They’d say, “Make sure you look both ways to be sure no cars are coming before you cross the street”. It is just a common sense rule we all learned and we all follow. Yet there are thousands of people injured or killed crossing the street every year. Is the rule in error? Emphatically no! Then how do we account for the injuries? There are 2 cases, either people do not follow the rules or they use bad judgment in applying the rules. In the first case, they get distracted and do not look both ways and in the second case they look but make a judgment error. This second case applies to my SLW trading. I looked both ways and thought I could outrun the oncoming car. In spite of having good, safe, and clear rules, one can still use poor judgment and get hurt.

The specific details of the SLW trade are listed in the RadioActive Trading “Track Record” with notes on each trade. But here’s a summary of those notes to put emphasis on how poor judgment can hurt your results in spite of following the rules. Let’s begin with the initial set up of the trade:

Five line set up for the SLW Married Put:
Buy SLW 100 Shares on 10/21/2011: $29.72
BTO 1 2013 19-Jan 35.00 Put: $11.00
Total Invested: $40.72
Guaranteed Return: -$35.00
Total Amount AT RISK: $5.72 or 14%

First notice that the risk is already fairly high at 14% because the put option I chose for protection is far out in time, 16 months. Generally the puts we use in RadioActive Trading are only 6-12 months out in time, but I wanted SLW as a long-term investment and I knew the cost of the insurance would be cheaper per month if I bought the option with a longer time to expiration.

Over the next year, I wrote several covered calls against my married put position (IM#1) to lower the effective cost of the shares. I also had an opportunity to use Income Method #4 (IM#4), which rolled up the put insurance to the $40 strike and locked in some additional guaranteed profits. These applied income methods and some dividends reduced the maximum possible loss in the position to the 4-5% range by November of 2012 when the stock was around $40 per share. At this point in time the stock looked very promising and if something went wrong the most I could lose was 4-5% or a few points, even if the stock went to zero. Also note that my decision to use a longer term put initially was justified since the stock move from $30 to $40 took 13 months. Here’s where the story gets interesting.

It turns out that SLW at $40 would not happen again. From late 2012 to July 2013 SLW declined to under $20 per share and then stabilized. During the next 2 years there were rallies up to the high $20’s, which gave me hope that SLW was about to move back up. Each time SLW would lay flat for a month I saw an opportunity to apply IM#9, which rolls the put down to extract put premium and lower the breakeven point. But as mentioned in the BluePrint, each time you lower the put strike price it increased the potential maximum risk. IM#9 was applied 5 times. Each time I thought SLW was at the bottom and would recover. Each time IM#9 was applied the maximum risk was opened up a little more from 3.8% to 11.3%, 15.3%, 19.2%, 19.6%, 30.4%. All in the anticipation that a new low was at hand and the stock was ready to advance again. Unfortunately by April of 2015 SLW just collapsed to the $12 range.

Mistakes are the seeds of learning and growth. I learned that Income Method #9 (IM#9) can be effective, but there is a dark side if applied too often and the stock continues to fall. Each time IM#9 is applied the potential risk is increased, Therefore, if it is not successful after an application or two, your assessment was probably wrong. You might want to just walk away and avoid continued judgment errors – don’t cross the street to outrun the oncoming car.

Here’s a positive takeaway from my story. The decline from the original purchase point was 58% and the decline from the stock high point was roughly 70%, but my married puts limited the loss on the position to 27%. In retrospect, I should not have allowed my risk to increase above the 4% level that was achieved at the end of 2012. It was poor judgment and pure arrogance on my part to think I knew where the bottom was for SLW.

So where do we go from here? SLW is still my stock of choice to hedge against inflation in the economy and to take advantage of any increase in the price of gold and other commodities. But in the last 2 years with low inflation, a rising US dollar value and lower oil and commodity prices this was not the best of times for SLW. My timing was bad. But I still think inflation will come back and commodity prices will rise again at some point in the future and that will be the time to ride SLW higher. I just wish I knew when that’ll happen!

Ernie Zerenner
PowerOptions & RadioActive Trading

About Ernie Zerenner

Ernie is a self-directed investor after having retired from the Hewlett Packard Company. He has been a stock and options investor for over 40 years and currently trades for his own account. He is an owner of both RadioActive Trading and PowerOptions and uses the tools he developed on both sites to find, analyze, and manage his trades. Most of his trading activity uses the principles of the Blueprint to hedge his investments for safety.