GOOD QUESTION! Why risk the extra .56?

Well, the answer is that I wouldn’t. INTC happens to NOT be on the list of stocks that I would trade Radioactively.

You have discovered a stock that, because of the put/call ratio, favors the purchase of a call instead of a married put. That is, the pricing of the call vs. the AT RISK amount in a stock purchase plus the same strike put risks a greater amount.

The stocks that I play nearly always have the reverse situation: ESRX, for example, will allow me to pick up stock plus a Jan 2012 put with .50 LESS risk than if I bought a call at the same strike. This “puts” the edge in the hands of the married put holder more than the call buyer.

Since call prices for ESRX are inflated and INTC’s are not, I would filter out the INTC trade and be more likely to take the ESRX one. SHorting calls against ESRX will promise a higher premium and the protection will cost less. Better all around

Those other advantages you mentioned are still in place of course. For people that already own stock but are only cleared to trade covered calls and long calls and puts… the RadioActive style of protected trading fits like a hand in a glove.

Thanks for your comments!

Happy Trading,

Kurt Frankenberg

I see the advantage in an account with limited option-writing privileges, or for people who don’t have the discipline to size positions correctly. I think the benefit is less clear for accounts with full trading privileges, since there are so many ways to profit from selling premium rather than buying it.

Here’s what I mean by “sell calls and spreads at a lower clearance”:

The vast majority of ‘civilians’ that trade options are only cleared to trade covered calls. Their experience level and broker’s policies don’t permit them - ironically - to do spread trades that are actually a lower risk than the covered calls.

Trading clearance is more a function of brokers trying to cover their own butts than actually allowing their clients to manage risk. If someone is relatively new to options, they might NOT have the clearance to sell a call against a call… much less sell a bear call spread against another call… even though this might be a very safe and lucrative play.

A trade set up RadioActively does not have this limitation. Even in a trading account that’s only cleared for long calls and puts and covered calls, here’s what’s possible:

You might buy the ESRX stock above and a far-out protective put. THEN, to reduce your cost basis on the stock you might sell a near term call, but at the same time pick up a near term long call. After all, you are cleared to buy long calls and puts, and sell covered calls. The short call is “covered” by the stock. The long put is part of your permissions. The long call is also part of your permissions.

Result? A hybrid of a calendar spread and ratio call spread… that a low trading clearance or stodgy broker would NEVER allow against a long call position… but even Scottrade will let you do against a married put.

In this case, if EXRX goes up or stay flat, the bear call spread that you have ‘legally’ put on will expire worthless, reducing the cost basis of your stock and bringing you another step toward bulletproof.

(’BULLETPROOF’ is the term I use when your net cost basis for both the stock and the put are LOWER than the strike price of the put. You can’t lose but still have unlimited upside potential)

On the other hand, if ESRX goes up to the moon, your bear call spread will go against you, yes… but you also OWN the STOCK. So you are protected, can take income, AND still have unlimited upside potential.

Pretty cool? Yeah, I thought so. And you can do this just by owning stock and having Level 1 trading clearance, not even a margin account. That’s why I introduce married puts to so many people.

Happy Trading,

Kurt

I think another way to answer Larry’s concern about starting out at max loss is by simply reminding him that the max loss is only achieved if the stock doesn’t rise all the way out to expiry. The theoretical day-by-day value will be a lot different however - if the stock moves even a penny up the moment after you buy it, you should be making a (tniy) profit already!

I think it would be easier to show with a diagram…hockeystick line for expiry payout, and a smoothed parabolic upward sloping curve for theoretical.

I’m assuming you are familiar with put/call parity and options pricing models since you like to talk about how a long call is not equivalent to a married put. Therefore, I’m surprised that you didn’t acknowledge the disparity in CREE pricing between the synthetic stock and the actual stock that I pointed out using the CREE prices provided in your example.

Using the mid prices of the $80 call and $80 put, the synthetic is priced at $67.27 with the stock at $65.85. The options are pricing the synthetic stock $1.42 higher than the actual. This is about $1.12 too high. The Jan2011 synthetic should only be about $.30 higher than the actual stock price.

Unfortunately, the trading platform that I use does not provide me with intraday option prices so I cannot verify the CREE pricing in your example. However, I can use end of day data to support my argument that the synthetic stock is way overpriced based on the pricing in your example.

Here are the end of day synthetic stock prices based on the mid prices of the call and put from 5/20/10 using various strikes in the Jan2011 option chain.

CREE closes at 65.01

45 Strike - Synthetic priced at $65.23
50 Strike - Synthetic priced at $65.27
55 Strike - Synthetic priced at $65.33
60 Strike - Synthetic priced at $65.30
65 Strike - Synthetic priced at $65.25
70 Strike - Synthetic priced at $65.32
75 Strike - Synthetic priced at $65.32
80 Strike - Synthetic priced at $65.35
85 Strike - Synthetic priced at $65.37
90 Strike - Synthetic priced at $65.37
95 Strike - Synthetic priced at $65.37
100 Strike - Synthetic priced at $65.33

All of these synthetics are priced at $65.30 +/- $.07 with the stock at $65.01. This implies that the Jan2011 synthetics should trade at about $.30 above the actual stock price. This is one of the reasons why I’m questioning the pricing provided in your CREE example that shows the synthetic trading at $1.42 over the stock. I’m not saying it isn’t possible but I’d be very surprised if it did.

In addition, the option pricing you provided shows a large disparity in implied volatility between calls and puts with CREE at $65.85. A mid price of $15.32 on the 80 call implies a volatility of 92.83. A mid price of $28.05 on the 80 put implies a volatility of 87.87. This intraday 5 point skew seems very unlikely when compared to the end of day pricing. At the end of the day on 5/20/10, the 80 call price implies a volatility of 62.03 while the 80 put price implies a volatility of 62.07. There was no skew at the end of the day.

Finally, when comparing the CREE options prices you provided against end of day pricing on 5/20/10, it would appear that implied volatility for the Jan2011 options went down 25-30% during the day since your pricing implies a volatility of 87-92% while the end of day pricing implies a volatility of 62%. This would seem almost impossible given the overall market conditions and the price action of CREE on 5/20/10. Virtually every measure of overall market volatility closed at or near the high on 5/20/10. In addition, CREE was down over 8.8% from the previous close, 5.5% intraday and it closed on its lows. That is hardly the environment where I would expect to see implied volatility contract 25-30% as the CREE options pricing suggests.

Everything I know about theoretical options pricing tells me that the stock/options prices you used in your CREE example should not have existed simultaneously. However, given the current market conditions of the past week, I guess anything is possible.

Regards,

Jerry

When I get into a stock plus put combination, I get filled at the ask sometimes but almost always between the strikes… and with “edge” like I’ve described.

You’re welcome to follow along with me!

Happy Trading,

Kurt