New Blog Series: Bulletproof THIS!

Heya Traders!

We’ve been talking about “Bulletproofing” in the last several RadioActive Trading Webinars. In the most recent Webinar, I asked viewers if they would like to volunteer to see how the stock that they’re holding NOW… Could be “Bulletproofed”.

(By the way, our twice-weekly FREE options training education webinars are held on every Tuesday and Thursday at 12:00 noon, Eastern Standard Time. Go to www.radioactivetrading.com to register for next free event.)

“What if the stock that you’re holding now is up from where you bought it? Who would like to know how to make that  stock “Bulletproof”… But leave the upside open for further gains?” ~Kurt Frankenberg

Ahh, Bulletproofing.  “Bulletproof” is the term I like to use to describe the situation that’s created by our Income Method plays. Once the combined, net cost basis for both a stock and a protective put option equals LESS than the strike price of the put, it’s “Bulletproof”.

For example, say that by using various RadioActive Trading ideas, we end up with a net cost basis of $54.05 for both XYZ stock and the March $55 put option. If XYZ wants to go up between now and March expiry, the profit can be more than $.95. But it can’t be less. That’s what we call “Bulletproof”.

At yesterday’s webinar, I posed this question: “What if the stock that you’re holding now is up from where you bought it? On the one hand, you can sell now, but you might feel silly if the stock keeps going up.

“On the other hand, if you don’t sell now… and the stock crashes… you’ll end up giving your gains back to the market. Who would like to know how to make their stock “Bulletproof”… But leave the upside open for further gains?”

Hoo boy. We got a lotta responses 😉

Here are few of them: A RadioActive Trading FREE Webinar Viewer named Steven wrote in saying that he had shares of CLX at a cost basis of $55. He didn’t specify how many shares he had. Ravi wrote in with 200 shares of RCI at an average cost basis of $27.50. And David has 200 shares of AAPL at $408.75 cost basis, lucky bastard. 🙂

I can “Bulletproof” each of the above trades so that they cannot lose, but still have the opportunity to go up even further. Wanna know how? Stay tuned.

In this new series, I’ll be giving four different answers to the Bulletproofing question for four different Traders. Each solution will use a different combination of options to “fence” in a guaranteed return, but also make for the possibility of greater gains.

I’ll get to each of these Webinar Viewers on how they might add puts and use Income Methods to “Bulletproof” these positions. Seeing as they were purchased without a put option, they have no protection. But NOW, we’ll add a put option plus one or more of the Income Methods to create an advantageous position for each of these situations.

But first, Ahmed. Those other Viewers whose names and companies I mentioned own stocks that are up, but they don’t already have a put option in place to protect them. We’ll help them later in following posts. But Ahmed had the foresight to buy a put option for insurance already. His setup is a plain-vanilla Radioactive Trade or RPM.  We’ll show how to “Bulletproof” him first.

Ahmed is sitting on shares of KLAC plus a June $49 put option at a net cost basis of $52.04.
That means that right now, if KLAC crashes he might lose a total of ($52.04 – $49) = $3.04.

That’s actually pretty good… his risk is less than 6% but his upside potential is unlimited. The picture looks like this:

But Ahmed would like to eliminate some of his risk to this point. He’d like to eliminate ALL of it, but right now that’s not practical. I’m going to demonstrate an Income Method that will make him darn NEAR “Bulletproof”, but still leave the upside open. Take a look:

Buy to Open June $55 put    $5.80
Sell to Close June $49 put -$2.25
Total Expenses              $3.55

Now, that LOOKS like an expense, and not “Income”… because it really isn’t income we may spend right now. I’m showing Ahmed spending $3.55… but in so doing he is RAISING the minimum payout of his RPM (married put position) by $6.00. See that? Instead of being insured by a $49 put option, now the $55 put guarantees his exit at $55 a share minimum regardless of what the stock does from here.

After Income Method #4, the most Ahmed could possibly lose on this play is .59 cents a share, but his upside is unlimited. Oh… I really SHOULD mention that if Ahmed picked up these shares a few weeks ago, then that amount is reduced by .35 cents because of the dividend paid out on 3/1/2012. Also, in June another .35 cents is due to be paid, so that DOES take us into “Bulletproof” status with unlimited upside potential.

Ahmed doesn’t need to hold clear out til expiration if he doesn’t want to. The blue line on the graph is the value of the net position at expiration. But take a look at that red curvy line on the graph. That’s the value on May 1. At that time, Ahmed may decide to close the position ( that is, after taking dividends… duh) or he may decide to do one or more of the other TEN RadioActive Trading Income Methods to milk it for a little more cash.

Okay Traders! This is the first post of several regarding “Bulletproofing”. You’ll see my ideas for those CLX, RCI, and AAPL positions as well. Please take a minute and post your thoughts below. And come to tomorrow’s (or just about any Tuesday or Thursday) RadioActive Trading  Webinar at 12:00 noon Eastern Time.

Happy Trading,

Kurt