How to Bulletproof Stock in Three Trades

Heya Traders! In today’s post I’ll show you how one of our traders was able to bulletproof stock in three trades!

Earnings: Rolling the Dice with High Stakes

It’s November 1 as I write this post.

Tomorrow, AliBaba (BABA) reports earnings.

The news could CRUSH investors… or it may give them a serious boost.

For RadioActive Trader Greg Zerenner, earnings is no big shakes; he will make money no matter which way the winds of fortune blow.

BULLETPROOF! It's easier than you think to remove the risk in a stock position, but let it ride higher

BULLETPROOF!
It’s easier than you think to remove the risk in a stock position, but let it ride higher

Because Greg used the RadioActive Setup as a context for trading as many as twelve “Income Methods”… reducing the cost basis of his married put to the point that it’s lower than the strike price of his put.

That means “heads you win, tails you can’t lose.”

WOW.

Check the deets, yo:

The “RadioActive Profit Machine” Low-Risk Trading Setup

Okay let’s track this, shall we?

FIRST TRADE: Buy an uniquely arranged married put.

Greg began his RPM, or RadioActive Profit Machine August 23rd this year with 100 shares of AliBaba (BABA) at $96.38.

At the same time, he also picked up an April 2017 $97.50 put option for $9.30… an IN-the-money put option with a far expiration. This gave him three things:

  • A very safe, single-digit risk investment in case the stock took a dump
  • Unlimited upside in case the stock went skyward
  • As long as eight months to use the proprietary RadioActive Trading ‘Income Methods’
BABA RadioActive Profit Machine (RPM) Setup. Even at the beginning he only risked single-digit percents (7.7%)

BABA RadioActive Profit Machine (RPM) Setup. Even at the beginning he only risked single-digit percents (7.7%)

His position began with only 7.7% of his capital AT RISK… but that wasn’t going to be the case for long.

Capturing Premium “Upside Down” to Reduce Risk Further

Second Trade: In response to the market’s move, swap a cheap put for a more expensive one.

The next thing that happened with BABA was that it exceeded the $97.50 price point. In the RadioActive Trading Blueprint, for cautious traders that’s an indication to take premium upside down.

“Whaaaaaa…?” you might be saying. “How on Earth do you capture premium upside down?

Simple. BABA went up, which meant that the April $97.50 put option’s value went down. On September 27, Greg sold that April $97.50 put for $6.30… and in its place he bought an April $110 put for $11.90.

Let’s keep it simple and visual:

"Income Method Four". Swapping the $97.50 put for a $110 put costs $5.60, but RAISES the minimum payout by $12.50. Nice.

“Income Method Four”. Swapping the $97.50 put for a $110 put costs $5.60, but RAISES the minimum payout by $12.50. Nice.

On the surface, it looks a lot like Greg “lost” $300. After all, the first put was bought for $9.30 and sold for $6.30.

Ahhh, but the second put was made cheaper too. Plus, the first put still had a lot of the value it started with.

So that when he cashed in the first put, it was sooooper cheap.

So what does “capturing premium upside down” mean?

Lookit: Greg spends $5.60 ($11.90 for the higher put, minus $6.30 for the lower one)…
…but he gets to adjust the guaranteed sell price of the stock from $97.50 to $110!

First Step: 7.7% risk in the setup

First Step: 7.7% risk in the setup

Spending $5.60 to get a $12.50 return. That’s good business.

Here’s the new risk picture of Greg’s stock plus long-term-in-the-money-put:

After "Income Method #4": Risk reduced to 1.2%

After “Income Method #4”:
Risk reduced to 1.2%

 

Eliminate ALL Risk… Make it BULLETPROOF

Third Trade: In the context of all this, sell a covered call.

And now we almost get lazy. Those of you that are familiar with the use of covered calls, take note: Instead buying stock close to earnings, and immediately capturing a tiny premium, you risk MOST of your capital on volatile stocks.

But Greg… not so much.

By now Greg has an instrument that can’t get him in trouble, no matter how low the stock may go post-earnings. But he CAN grab inflated premium just before earnings with no worries because of his setup and the adjustments so far. On October 29 he snatched $1.64 by selling the November $110 call.

Last nail in the coffin: there is now NO risk as the cost basis for the stock plus put is LESS than the strike price of the put.

Last nail in the coffin: there is now NO risk as the cost basis for the stock plus put is LESS than the strike price of the put.

This little bit of premium normally would provide less than 2% hedge in case of stock going down in a “plain-vanilla” covered call trade. But his case, Greg has eliminated the last vestiges of risk at all, while at the same time securing the chance for as much as a 7.6% payday.

Behold:

No risk, no mas. Worst case scenario is a payout that handles commissions to date; best case is a healthy profit

No risk, no mas. Worst case scenario is a payout that handles commissions to date; best case is a healthy profit

Now that there is ZERO risk, Greg will have a restful night’s sleep. Jealous? 😉

What’s Next for this Bulletproof Position?

Well, one thing is for certain. Greg can’t lose, even on the eve of this precipitous news event.

If BABA takes a total DUMP and goes to $50 a share… Greg gets to cash in his chips and have no risk.

But on the other hand, say BABA goes to $107 after earnings and thru expiration. Greg has no obligation to deliver his shares after that… but he MAY decide to use one or more of the other ten Income Methods to milk his BABA RPM for more premium.

Hey, this bulletproofing thang isn’t like a UFO or a unicorn. We see this stuff all the time.

For example, Greg’s buddy Mike is sitting on a position now that’s bulletproof to the tune of over -10% risk. That is, ten percent negative risk.

Because his Footlocker (FL) stock cannot fail to deliver him less than 10% profits.

Oh, Mike gets to grab dividends too.

How about YOU, dear reader? 🙂

Would YOU like to learn to become Bulletproof in earnings season?

Put your comments below. I’ll send you a cheat sheet on how to bulletproof your stocks.
Better yet, join the mailing list and you’ll get a free gift on me.

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.