That’s right… I’ll say it. Married puts are better than covered calls, as short- OR long-term trading strategy.
I WOULD say that no one else does… but a lot of folks have jumped on the bandwagon recently and are beginning to teach the benefits of married puts. Welcome to the club 😉
SO! Ready to count ’em off? Here goes:
C.H. shared a trade from November 2009 in which she picked up a cool 7.9% in sixteen days for a covered call trade. I told her that she very likely would have done better with a married put that was assembled according to the principles in The Blueprint.
Using the options trading back-testing feature at www.poweropt.com, we discovered that indeed… if C.H. had only used a married put trade the way that I teach it, instead of a covered call trade… her return would have been 12.6%, and in a shorter time-frame.
What does THAT do to the silly notion that puts are expensive?
Truth is, most folks know about the protection feature of trading stock and using a put for protection. But what MOST folks don’t know is this…
While protecting you against losses on the downside of a trade, a put option ALSO makes it possible for you to have an unlimited upside.
When you look at the graph of a married put position, it look like a hockey stick. The flat line below the break-even point is firmly on the ice… a representation of the fact that if something goes horribly wrong, your losses are absolutely limited.
On the other hand, that diagonal line going up and to the right represents your UN- impeded profit potential. When you look at the graph of a covered call, on the other hand, the “hockey stick” is upside down.
That doesn’t seem right… does it? By owning stock, you take on all the risks of ownership. On the other hand, if it turns out that you have a winner, say buh-bye to the upside potential. With a covered call trade, you accept a little bit of money in hand NOW… to perhaps be forced to deliver your winning stock to someone else at THEIR price.
Covered calls limit your upside; you might make a little bit of short term income, but then must deliver up your winning stock at a bargain to someone else. Who wins in this transaction?
As Warren Buffet once said… if you’re sitting at a poker table for more than fifteen minutes and don’t know who the patsy is… YOU’RE the patsy!
Don’t worry… while the covered calls strategy will let you have a only tiny stipend for the winning stocks you have picked, and turn those winners over to someone else… you may console yourself by holding onto the losers.
😉
Hey, hope I’m not rubbing it in. Too much. But, hey… if you’re really making those 3-5% per month gains that everyone implied or outright promised, you probably stopped reading a while ago.
There is a THIRD way that married puts outperform covered calls. Not only do they protect better on the downside, not only do they leave the upside open so that a big winner can win bigger…
The third way that married puts outperform covered calls is that the put option itself can be manipulated for profit.
I like to refer to “Spread Trades AFTER the Fact”… when your stock behaves a certain way you can end up with extra money from manipulating the insurance policy that your put is.
In fact, there are TWELVE different ways to take money out of a married put arrangement, without necessarily selling the stock.
Interested to find out some of them? Let’s open this board up for discussion…your comments are welcomed below.
Other Income Method and Bulletproofing Resources
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Double Dippin’… Taking Even More Premium Than Covered Calls
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This Simple Trick Made My Stock BULLETPROOF
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What on Earth Is a Nested Spread Trade?
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Happy Trading!
Kurt
I'm Kurt Frankenberg, and I have discovered how to truly put the odds on the side on the individual investor.
I will love to know what are some of that married put winning stragedy
The married put, I believe, consists of buying a stock and buying a put re. the stock. How about buying a LEAP and then buying a put? Would that be an effective strategy?
No. You are paying double for time value (on BOTH sides of the stock’s movement) and need a much larger move to overcome that expense. You also are over-leveraged.
Mike Chupka, my friend over at PowerOptions, trades radioActively and comes across this question all the time. He’s done an excellent job of answering this question in a white paper.
The position you describe is called a long strangle and I don’t encourage it.
Hello, I am fairly new to using derivatives. I did use covered calls in the past, but not recently, because of how I got burned when the stock market lost so much value a couple years ago.
However, I cannot seem to master short-term trading, either, and I recently got burned again with my long termers. They say, use a stop-loss, and I got stopped and lost!!!!!!!!!!! So, I was thinking if I could use covered calls again, somehow, which used to work in a less volatile market; then, I thought to use protective puts, but the puts were so expensive, that the stock would have to increase way much. So, I have been poking around the internet to learn how to use the market in a less risky way to make money. Ao, how can you buy a put, and still make a profit?
Thanks for asking, Susan. The LONG answer to your question is about 245 pages… I wrote a book about it called, The Blueprint. 😉
Short answer, however: married puts do not behave the way everyone assumes. Especially if there is time left til expiration. When I buy a stock and a put option, what I am doing is guaranteeing a favorable exit even in a bad market… like the one that you got “stopped out” in.
However, that’s not where the trading ends… it’s the beginning. If your stock goes UP, as you would hope in the first place, your put does not drop in value dollar for dollar. It may drop fifty cents for each dollar that your stock goes up, at first.
As your stock continues up, you may be looking at losing twenty five cents in your put’s value for each dollar that your stock goes up.
Additionally, once your stock has behaved a certain way, you may use one or more of TEN “Income Methods”… adjustments to the original position, most done at a credit, that take income, lower risk, or both.
Once you have used the Income Methods to lower your cost basis on both the stock and the put, you may find yourself in BULLETPROOF status. “Bulletproof” is the term I’ve been using since 2002 to describe the status of a married put in which the collective cost basis of your stock and put option is BELOW the strike price of that put option… in other words, a place in which you cannot lose but your stock still has the potential to grow.
This is the exact opposite of covered calls trading, in which you take on a big risk in hopes of making 3-5%. I will start out with a 5% risk or so… then perhaps bulletproof it… then go on to big gains.
It doesn’t happen all the time, but it does happen… where I’ll pick up an 8%, a 15%, a 30% or even 40% gain on my stock while being totally protected. By “totally protected” I mean NOT having a finicky stop order in place, but rather having a put option GUARANTEEING my exit point.
Sound good? It did to me! That’s why it’s the only way I trade. Come take a look at one of our twice-weekly webinars.
Happy Trading,
Kurt
I hear what you’re sayin’ – but…
On the stock I own I would plan on selling a call for a strike price of (say a 2% gain) on the underlying and using that money to buy a put at, or as close to under, the strike price as the income from the call allows. (If I actually make a few nickels here so be it.)
Then – as in your example the stock goes up as soon as my CC expires or is exercised I simply buy back into the stock – again with a new higher call and higher put and walk the stock up.
That way I get MOST of the up, and at every step have a guaranteed (more or less) no loss exit.
What am I missing?
Good Grief Charlie Brown!!!
In the first main paragraph I mean “…or as close to under, the UNDERLYING price” Not the “strike” price of the CC.
Who ever said too much scotch can never be a bad thing! Sorry for booboo…
Great question! One of Kurt’s axioms for RadioActive Trading is:
“Cut your losers short – and let your winners run”.
The position you described is a Standard Collar. If you have joined us for the free live webinars, you have may have heard that most of the time my personal trading account consists of 50-60% RadioActive Trades, 20-30% Standard Collars and 10-15% in spreads on the Indexes or ETFs.
Standard Collars are limited risk trades, but they do cap the upside and do not allow the winners to run. In a Standard Collar you can guess right on the direction of the stock but end up handicapping your gains if the stock gaps or moves up quickly in price.
Here is a good example: On Feb. 3rd, 2012 I entered a Standard Collar on PXP. I bought the stock at $38.91, sold the MAR 39 call and purchased the MAR 35 put. The % if assigned profit IS 3.2%, and the max. risk is 7.4%. The stock moved above $40 per share on the 6th, then above $42 on Feb. 7th. PXP is currently trading around $46.00 per share.
With this move it did not make much sense to pay more into the position and roll the call for a minimal increase in return. I guessed the right direction, but cut my winner short using the Standard Collar position.
Had I opened this position in PXP as a RadioActive Trade, I would have purchased stock and at the same time purchased the AUG 43 put for around $6.80. My total at risk would have been 5.9%, but my upside profit potential would have been unlimited. As of today I could liquidate the RPM for a 7.1% gain (just about twice what the Standard Collar offered) or have a variety of Income Methods at my disposal to Bulletproof the RPM and generate extra income.
Since I started trading these techniques 4 years ago, my RPM positions have outperformed my Standard Collar positions. This is why 50-60% of my personal trading account is invested in RPMs. Standard Collars are a good strategy and much safer than covered calls, naked puts or spread trading…but they do cut your winners short.
Many thanks for the reply.
I will be monitoring the site for more webinars. I’m impressed with what I’ve seen.
[…] Revolutionary “NEW” Technique Turns Your Trading Right-Side-Up A Married Put Beats a Covered Call THREE Ways […]