From: “Rick S.” <ADDRESS REMOVED FOR PRIVACY>Sent: Wednesday, January 04, 2012 9:27 AM To: “support@radioactivetrading.com” Subject: RE: Paper Trade Question
Gents – I am going to register for the seminar tomorrow – As a total Newbie who has read the blueprint and watched the CDs over the last few days I was wondering if you could walk through the FIST position sizing exercise at some point and choose some stocks to trade using a portfolio of say 400K and one with 100K and one with 40K or something along those lines so we can see how you calculate the number of positions one could safely open and manage.
Thanks
Rick S.
(CONTACT INFORMATION REMOVED FOR PRIVACY)
Hi, Rick!
Do you have the FORTS (Foundations of RadioActive Trading) CD? It has all the formulas you would want for this question.
I’ll walk you through an example though!
Consider the following RadioActive Profit Machine “Five Lines” Setup:
Buffalo Bill Wild Wings (BWLD) Jan 5, 2012
Buy 100 Shares BWLD at $67.40
BTO 1 Jun 2012 $75 put +$11.40
Total Invested $78.80
Guaranteed Exit -$75.00
Total Amount AT RISK $ 3.80
So in this example, you have a real amount of $380 AT RISK per 100 shares.
That’s 4.82% of the total of the capital committed to this trade: $78.80/$3.80 = 4.82%.
Now, let’s look at your example of a $40K, $100K, or $400K accounts.
RadioActive Trading guidelines say to risk 0.5% to 2.0% of your capital in any one position. The above real setup puts $380 AT RISK per 100 shares. For simplicity’s sake, let’s round that to the nearest hundred, or $400. We’ll round all other numbers conservatively as well.
If you are very risk averse, and would only want to risk 0.5% per position… you could not do this trade in a $40K account. You would have to look for another trade because 0.5% of $40k is $200 and buying 100 shares and 1 put contract risks $380 (or $400 rounded). If you have the $100K account, the trade is permissible because 0.5% of $100K is $500. You could trade 100 shares plus 1 contract. If you have $400K, 0.5% of that is $2,000 so you might trade 500 shares and 5 contracts.
Now, I mainly trade with 1% or so of portfolio risk per position. So for me, I COULD have taken the trade with only $40K. 1% or $40K is $400, and we are rounding the $380 risk up to $400 so that’s perfect. In a $100K account, I could get 250 shares and 2 1/2 contracts, right? No… since there are no half options contracts and because we are rounding everything conservatively, we would only pick up 200 shares and 2 contracts with a $100K portfolio. And with a $400K portfolio, 1% risk means $4,000 so it would be okay for me to get in 1,000 shares and 10 contracts.
If you like to play it fast and loose… or, rather as fast and loose as RadioActive Traders ever really get… and risk 2% of your portfolio per position… you would double everything from the last paragraph. A $40K account would allow you to play 200 shares and 2 contracts, a $100K account would make for 500 shares and 5 contracts, and a $400K account would permit 2,000 shares and 20 contracts.
In each of the above cases you would still have quite a bit of your starting capital freed up to put into other plays. Likewise in each of the above cases you can keep your AT RISK amount fairly close to equal among all sorts of stocks; a $50 stock, a $100 stock and a $200 stock may be likewise evaluated. A very volatile, a somewhat volatile and a NOT volatile stock may also be equally managed and the risk ‘smoothed’ among them because the position sizes adjust themselves to fit according to how much cash you have to play.
Hope that answered your question, Rick! Enjoy The Blueprint, and consider picking up FORTS: Foundations Of RadioActive Trading CD on the site for $89. It goes into greater detail and has a money back guarantee so I think you’ll find it useful.
Happy Trading,
Kurt
I'm Kurt Frankenberg, and I have discovered how to truly put the odds on the side on the individual investor.
Hi Kurt, Have you tried working with 20% or 30% Extra married put option and make adjustment for slight increase in the cost? It should give us opportunity to come out of the trade with no loss or small profit should the trade starts going against the preferred direction.
Can this trade also work in reverse direction by going short and using call option instead put option?
Many thanks.
Rimo.
Hi Rimo: Yes, you can reverse the RPM setup by doing a married call… a short stock position with a long call for protection. But… keep in mind that we are trying to REDUCE the risk in the trade over time – with a married call your risk is increasing over time due to margin interest on the short stock position. Alternatives that allow playing the bearish market would be – buying a put option or better yet, play a regular RPM (married put) on an INVERSE ETF.
I would like to hear your reply to the FIRST of Rimo’s 2 questions. He wanted to know about buying a married put further in-the-money to increase the insurance return and maybe even make a little profit from an unexpected decline in the underlying stock price.
Hi Albert: I’m not totally clear on what “20% extra married put” means. I’m not sure that he meant further In-The-Money. But, if he did, here is the response…
The RISK of a married put that is ITM is essentially the time value of the option. So, when you go further ITM, the time value should be lower and your insurance level is higher – so you get lower risk in the position.
All investors know: When you lower risk – you also lower reward. In this case, as you go further ITM, you get a lower probability of getting profitable since the stock needs to rise further to get to break-even.
When we teach this phenomenon – we call it the “Three Bears” since there you can pick your own risk level in a married put – you should be sure NOT to pick a risk level that is TOO HIGH – and don’t pick on that is TOO LOW. We should pick the risk level that is JUST RIGHT.
We teach our students to look for 3% to 9% as the max risk to begin with. This strikes a nice balance of risk to probability of reaching the break even. Of course, you can pick the risk level that meets your trading goals and risk aversion level. Some students do go higher. Also, to your best ability – timing the overall market condition can also give you a hint how much risk to take as well.
I want to follow up on that question and modify it somewhat
I am not sure what the percentage is but I am looking at a stock that is currently trading at 26.63 on jan 11 2012 and the aug 40 put is at 13.70 so that is pretty deep in the money so the total invested would be 40.33 so 0.33 of time value would be at risk if held until expiration plus the put if not sold before expiration
The question is } Is this more or less risky if the put is closed before expiration ?
I know if the goal is to expect the stock to go past the put to have a gain that is more risky but what if my goal is to have income ?
Just sell covered calls for a few months and than sell the put and the stock or just roll the put further out if the stock is around the same price
Right now the feb 2012 27 call is at 0.81 so that would more than cover the time value of 0.33 and I have another 6 months to write covered calls on it Is that considered Bulletproof or is that too deep in the money ?
I understand that the gain would be limited by the call if the stock goes up but I would say it’s less risky as far as the time value
Hi Mike: The questions you are asking is exactly what’s covered in The Blueprint. In it we teach you how to find good married put candidates that have the “right” amount at risk. Then how and when to use up to 10 different income methods to pay off the cost of your put insurance policy. It’s a risk-free purchase and the whole method is laid out for you. http://www.radioactivetrading.com/products.asp
Mike: We have another blog article that illustrates the ADDED RISK associated with what you’ve described… http://blog.radioactivetrading.com/2009/02/how-not-to-trade-income-method-1/
Thanks for pointing out the risk
Right now it’s just a paper trade just to see how it all behaves and find out what the risks are. I will try to follow the Blueprint but I just have a feeling that I will never have enough time to make up the risk in the time value
On that trade mentioned in the blog with KFT
Could you have applied IM#2 to mitigate some of the risk ?
Using the above 5-line setup, would it be correct to say that the amount required to actually purchase 100 shares and 1 Put option contract of BYLD would cost 100 x $78.80 or $7,880 even though the amount at Risk would only be $380.
You got it, William! That’s the beauty of the RadioActive Profit Machine; it has unlimited upside potential but risk is limited to 5-6% or less.
After this, the Income Methods can be used to cancel even that small risk.
Happy Trading,
Kurt