How on earth can a spread trade truly be riskless?  For example is it really possible to take a credit but never have to worry  about a credit spread doing against you? The answer is yes, provided that you understand the context in which to play it.”

You might have picked up $105, but may LOSE $145 instead!

Let’s look at another position with SBUX, a married put trade:  Here, I’m showing SBUX with a cost basis of $54.40, although right now it’s trading at $57.95 . Never mind about  the fact that  Starbucks is  currently priced  over three dollars higher  than the cost basis I’m showing; that’s  a topic for another post.

Stock plus put. When cost basis for stock is reduced, there may be zero risk; BULLETPROOF

Riskless Spread Trade

SO, I’ve been chronicling responses to a question I posed in one of my free webinars: “Say you have a stock that’s up. Would you like to know how to leave the upside potential open, but at the same time BULLETPROOF your stock so there’s no way you can lose any capital?”

My mailbox blew up. I’ve been responding to some folks by email, and others (with permission) I’ve been posting about.

THIS time, I’ll be sharing another ‘bulletproofing’ opportunity in which a new friend of mine stands to do very, VERY well, no matter which way his stock goes. He may even become “Bulletproof for LIFE”. I don’t know for sure if that will happen, but it certainly is a possibility.

This post is a little detailed but I’m gonna ask you to stick with it. I’ll compare the pros and cons of Steve selling now, holding without protection, or holding WITH the protection of RadioActive Trading methods. You’re gonna be ASTOUNDED at one possibility for Steve, which is bulletproof stock for life. Onward!

Let’s get some background out of the way, along with goals and a seeming conundrum for ‘Steve’. Steve owns 1600 shares of SBUX that he picked up at $12.50 a share. he wants to keep Starbucks for the long haul, seeing as how it pays a dividend and also it might represent a big hit in capital gains tax if he sells now.

Here is Steve’s catch-22: Starbucks is at an all-time high today (April 5, 2012). If he sells now, he will miss out on further upside in case the market keeps heading skyward. On the other hand this could very well be the top of the market. What to do? Sell now… take the capital gains hit (oh yeah, that)… and forever say goodbye to the potential further returns that Starbucks may generate? Or should Steve hold on and potentially lose the gains that he’s had up to this point?

Let’s use pricing from today, April 5, 2012. During intraday trading, SBUX hit as high as $58.47. By the end of the day it was at $58.18, with a cost basis of $12.50 per share, 1600 shares represents a potential liquidation profit of $73,088 right now. That is of course before capital gains taxes eat away at Steve’s profits from selling.

Remember that number: $73,088, minus taxes.

So we showed Steve how he might pick up 16 protective put options to insure his Starbucks stock, clear out ’til October at the $60 strike price for just $5.80. If Steve’s stock indeed does go up, his put options go down. But they will not erode in price as quickly as his shares of stock gain. Plus, those puts may be ‘swapped’ in the near future for other puts that will guarantee a higher and higher sale price. It’s still a bullish play to own stock along with a put.

Now, the objection that I often hear about buying puts is that it’s just plain expensive. Hm. Well, say that Steve wants to lock in the gains SBUX has had so far. But he sits on SBUX for a few days before selling and she doesn’t cooperate… the stock’s price retreats to $50 a share. Possible? Absolutely. In fact, it’s downright believable. $8.18 in missed opportunity times 1600 shares equals THIRTEEN LARGE ($13088 to be exact) down the drain. To me, THAT’s expensive.

Of course, because of his ridiculously low purchase price, Steve will still profit if SBUX retreats to $50 a share. That’s ($50 per share of SBUX) – ($12.50 cost basis) = $37.50 per share profit. Times 1600 shares, he’ll have $60,000. Not bad.

But..! If Steve picks up those sixteen October $60 put options at $5.80 apiece, a lot of the decline in the stock’s value will be cancelled if SBUX tumbles to $50. This screen from PowerOptions says that at the halfway point between today and October expiration, if SBUX is at $50, the married put position that he creates today will not be worth $60,000 in profit… but $67,536. That’s better, I’m a-thinkin’:

The red curved line shows what the married put will be worth if the stock is $55

How those put options looking now?

Now for the juicy part: Steve is also able to use ‘nested spread trades’ to bring in extra premium. He might, for example, sell 16 May $60 call options at $1.22 and use some of the proceeds to buy 16 May $62.50 calls for .57 cents . That’s a bear call spread that will generate, right NOW, .65 cents per share in cash. Times 1600 shares is $1040 cash IN, right now.

Adding a Bear Call Spread brings in premium but does not limit the upside

Don’t look now, but the liquidation price at $50 a share has gone up even more.

The way I see it, Steve’s stock can only do ONE of THREE things: go up, go down, or go sideways. Look at the comparisons between selling now, staying in without protection, and using the options plays. By April 30…

SBUX at $50 (down)
Sell today, April 5 at $58.18: Profit of $73088. Tax bill next year.
Hold without protection: unrealized profit of $60000.
Hold with put protection: liquidation value of $69344

SBUX at  $58.18 (sideways)
Sell today, April 5 at $58.18: Profit of $73088. Tax bill next year.
Hold without protection: unrealized profit of $73088.
Hold with put protection: liquidation value of $72736

SBUX at $67.50 (up)
Sell today, April 5 at $58.18: Profit of $73088. Tax bill next year.
Hold without protection: unrealized profit of $88000.
Hold with put protection: liquidation value of $79088

Using the put protection, plus Income Method plays, Steve can STILL participate in the upside. If he truly knows that SBUX will certainly go to $67.50, of course he would not pick up insurance… but who can certainly say what ANY stock will do? But with the put protection you see him still getting $6,000 more than if he sold SBUX today.

Sideways movement yield looks good too: $72736 with protection versus $73088 without. The difference is almost negligible. I should point out that if the stock KEEPS moving sideways, those bear call spreads will expire worthless in May… and Steve can do it again…

But best of all, if SBUX goes DOWN… well, Steve will have the opportunity to keep the $1040 from (at least one) bear call spread, cash in the puts… and still be long a stock that pays dividends.

This one point here will really bake your noodle: Steve has said that he is a holder. That is, he will hold SBUX regardless of a market crash or bad news. His cost basis is $12.50. So what if he puts on his protection… that still allows him to participate in further upside… but instead SBUX tanks down to $40 a share? Well, think about the liquidation price of ONLY the puts at expiration. Those were October $60 puts, remember? They have to be worth $20 bucks each.

So Steve cashes in his $60 puts for the $20 apiece and continues to hold SBUX. In case you’ve forgotten, Steve’s original cost basis for shares of stock was $12.50… now that is ERASED. He’ll still have 1600 shares of SBUX, but ZERO cost basis because the puts have paid for the stock.

If ‘bulletproof’ means that your cost basis of your stock is less than the guaranteed sale price… why, Steve is now BULLETPROOF for LIFE. The value of his shares of SBUX can never fall below his cost basis, because he has no more cost basis.

Turn that one over in your brain awhile, Traders! And, let’s hear your comments below. By the way, Steve did in fact pick up put options and do the bear call spread play. Let’s check in with him around May expiry and see if he’s happy he didn’t sell SBUX.

Happy Trading,

Kurt

“Cut your losers short and let your winners run.”

Our losses on the security are limited due to the protective put, but we still have unlimited upside profit potential allowing the stock to run.

Now, if I try the alternate approach of buying the same, far out in time protective put and selling a short term put against it, I still have a limited (monetary) risk on the position but I have also capped my gain.  If the stock rises 10, 20 or 30% I take no advantage of the further upside profits and I may in fact lose money on the position if the stock moves up or down (two ways to lose).

I recently presented and archived a webinar that discusses the RPM setup and comparing the initial Married Put trade to:  Substituting the stock with a short put, substituting the stock for an ITM long call (creating an ITM Long Strangle) and thoughts on why the OTM long call is not the same as the RadioActive Married Put trade.

To access the webinar simply go to www.radioactivetrading.com and click ‘Free Webinars / PodCasts’.  From the webinar archive select ’3 Core Principles and Trade Comparison (2/21/2012)’.

The entire presentation is very useful for any level of investor, but my thoughts on the RPM Married Put vs. the Calendar Put spread begin at about the 25 minute mark.

Mike Chupka
Director of Education – Power Financial Group Inc.

Today, I’ll be showing another ‘bulletproofing’ maneuver in which one of our webinar attendees (Ravi) might take out all the risk of owning RCI…. but still hold on in case it goes up even more.

Ravi wrote in saying that he had RCI shares, purchased over time at $25-$30. For the purposes of today’s post, I’m going to assume an average purchase price of $27.50.

SO, I just checked and RCI is selling at $38.95. That means that Ravi can get out right now at ($38.95 sell price) - ($27.50 buy price) = $11.45 net profit per share.

Of course, that also means that he can’t do ANY more with it… he’s out of the stock and there won’t be any more upside potential, or any more participation in dividends.

So Ravi isn’t keen on getting rid of RCI just yet… he sees greater upside potential… and he’s faced with a dilemma: “do I take profits NOW, or run the very real risk that RCI will reverse and my gains will disappear?”

Ravi COULD place a ‘trailing stop order’, which ostensibly protects him from that happening. If he places it at, say, 10%… that means that with today’s price of $38.95, he’d put that stop order at around $35. If RCI pulls back, he will have locked in a profit of ($35 sell price) – ($27.50 buy price) = $7.50 per share.

That is, IF the stop order goes as planned. There are two big, very common problems with a stop order:

1) it can get filled on a dip, and then the stock takes off again without you… and that’s just plain annoying. But also…

2) if there is a sudden GAP in the stock’s price due to a market upset, that means your stop order gets filled, but very likely not at the price you wanted. If there was a $35 stop order in place and the stock opens at $26 because of some overseas crisis… Ravi gets ‘stopped out’ of his shares at $26 or less. Not cool.

How can Ravi get the best of all worlds? How can he arrange it so that if there is a sudden reversal in his stock’s price, he may truly lock in a favorable sale price… but if his stock goes up, he can also participate in the upside?

How may Ravi continue to collect dividends… and have protection in place that assures him that he cannot lose any capital he has invested so far?

Here’s one of many RadioActive Trading plays that could be used by Ravi to build a fence around his stock holdings. The strategy involves using a put option to protect the stock, but paying for that put option using a ‘nested spread trade.’ Let see how that might develop, using today’s options prices with RCI at $38.95….

First, he might buy a July $40 put right now at the ask price of $2.90. Now, this will indeed cost Ravi $2.90 per share… but with RCI’s present price of $38.95, $1.05 of this is GUARANTEED to come back. After all, the put option will guarantee him a sell price of $40 for the stock:

That’s nice, you might say. BUT, Ravi is in the business of MAKING money with RCI, not spending $1.85 for an insurance policy protecting RCI til July. How can we prevent Ravi from having to come out of pocket for this protection?

We’ll use a near term bear call spread… formed by selling the April $35 calls for $3.60 and buying the April $40 calls for .30 cents. That’s going to generate $3.30 in credit, which will more than PAY for that July $40 put option’s premium of $2.90.

Think for a minute about this new situation… We’ve actually been paid ($3.30 credit from April bear call spread) – ($2.90 spent for the July $40 put option) =  .40 cents for having an insurance policy in place!

Could the ‘stop order’ offer that level of protection? No way.

Now, there is more to this setup than meets the eye. Depending on where RCI ends up at April expiration, Ravi may have actually locked in more than he could get today for selling RCI… and be able to leverage it further moving forward.

Hey, Traders! I’m not finished with this post. I want YOU to point out what you think the holes in it might be. Whaddya think?

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

Author’s Note: Ahem. Real quick, I need to emphasize that what follows is not an endorsement to buy or sell shares or options on DLTR stock. I’m simply using a recent couple of trades for sharing purposes. I think you will be amazed at the PLAY I’m going to share with you today, not pumping up demand for a particular company. That said…

Get this: I recently showed my FUSION Subscribers a riskless spread trade in which I picked up a credit… watched and waited for a while… closed that riskless spread trade for ANOTHER credit… and then I just recently put on another riskless spread. Indeed, money seems to be growing on my DLTR Dollar Tree.

Whoa, there Nelly! …Kurt, did I read that right? Did you just say you could put on a spread trade at a credit and incur ZERO RISK? And what’s this about CLOSING that same spread for another credit.

Heh… it’s TRUE… it’s possible to make a riskless spread trade. Provided of course that the context of that spread that it’s nested inside another position.

Take a look at this cool setup for DLTR first:

Now that’s the beginning point. I start all of my trades off with protected shares of stock; no matter how bad the market goes against me, I can’t possibly lose more in the above trade than 6.9%.

Now for the cool, “riskless spread trade” part:

On the same date (October 13, 2011) of the above setup, I sold to open four November $82.50 calls. Then, using SOME of that premium generated, I also bought to open two November $80 calls. Here’s how that went:

Sell to Open FOUR November $82.50 calls at $1.80 X 4 = $720 received
Buy to Open TWO November $80.00 calls at $3.10 X 2  = $620 spent
TOTAL Income                                                                = $100 bucks!

Now, here’s the deal. NORMALLY, a ratio call spread like the one described above would impose INFINITE risk. That’s because there are FOUR short calls and only TWO long calls. As the stock goes up higher and higher, that makes for a worse and worse situation because you would have to buy stock at whatever price it was trading, to deliver it at $80. Not cool.

Of course, that is the situation when doing the Ratio Call Spread all by its lonesome. But remember? I was showing it in the context of ownership of 200 shares of DLTR stock.

Ta-daaa! No risk. If DLTR were to have gone up in that timeframe, I would be obligated to deliver 400 shares at $82.50 all right… but I would have gotten 200 of them at $79.85 (see the setup above) and could get 200 more at $80 (because of the two long $80 calls I’ve been paid to own).

Well, it wasn’t to be. I had hoped that DLTR would go and stay above $82.50 a share but come November 15, just three days before November Expiration DLTR was trading in the low $78s, high $77s.

Not to worry! Since it seemed almost a GIVEN that DLTR would not get back to $82.50 (it didn’t, BTW) by expiry… I did the following move to close the ratio call spread:

Sell to Close  TWO November $80.00 calls at $0.85 X 2 = $170 received
Buy to Close TWO November $82.50 calls at $0.30 X 2  = $  60 spent
TOTAL Income                                                                = $110 MORE bucks!

So to date it’s $210 income into the account, being set against the cost basis of those 200 shares of DLTR.

The puts are still in place.

And on 12/16 I was able to put the following ratio call spread AGAIN:

Sell to Open FOUR January $82.50 calls at $2.30 X 4 = $920 received
Buy to Open TWO January $80.00 calls at $4.00 X 2  = $800 spent
TOTAL Income                                                             = $120 bucks AGAIN!

That’s another reduction in the cost of the stock that’s protected by the May $82.50 puts. If this keeps up, soon I will be BULLETPROOF, meaning that there will be no remaining risk at all.

Now, I know what you may be saying. “Why not just sell a covered call to generate those premiums?”

Well, the point of doing these ratio call spreads is to CAPTURE a little extra green when the stock DOES go up. In the case of the November ratio call spread, that didn’t work out. Although it IS nice to get PAID to close a trade.

BUT..!

The really cool thing that MAY happen this time around is that DLTR may close above $82.50 this time.

Should that happen, two of those calls will cause my shares of DLTR to be liquidated, unless I do something to keep ‘em.

My puts will still be worth something, so I’ll cash them in too.

What will that leave in place? Oh, only two bull call spreads… formed by the two remaining short calls, offset by the two LONG calls… that I got PAID to own.

Catch that? It means that since all those aforementioned calls will be closing in the money… since DLTR is above $82.50… I get to collect the maximum payout on two bull call spreads ($500 extra!)… and let’s say this again: I got PAID to own those bull call spreads.

Ahhh.. the joys of trading RadioActively…

Hey, come check out the year-end special we have going now on RadioActive Trading education materials. Since they are 100% guaranteed, there’s no risk to THESE trades either…

http://www.radioactivetrading.com/products.asp

Happy Trading!

Kurt

In this post: a trade that is truly unique and you have likely never seen anything like it before. Also, in tomorrow’s webinar… the unveiling of a seriously amazing offer for folks that have been considering picking up The Blueprint or RadioActive Trading Home Study Kit.

So, what would you say if I told you that you could do a spread trade with ZERO risk…

…that later that trade might capture even more premium…

…and that you OPEN it at a credit and potentially CLOSE it at another credit?

Would you think that was a purty awesome arrangement?

Well, I think so too. That’s why I would like to invite you to Tuesday’s groundbreaking webinar to see the details of the management of this trade. RIGHT NOW I’ll give you some of the particulars:

On November 10, 2011 my FUSION Members got to see me record this RadioActive Profit Machine. I’m adjusting numbers for a stock split that has happened since:

Now, the RadioActive Profit Machine setup is scalable. Rather than picking up 100 shares and 1 put for example, my play was with 400 shares and 4 puts. But the ‘bottom line’ is still this: there is no more than 7.1% of the underlying issue AT RISK, no matter what happens to the underlying stock.

Okay, so here’s what happens next… On December 2, the $45 calls were asking $1.80, while the $46.25s were bidding at .93 cents.

I sold to open eight December $46.25 calls, while using some of the proceeds to buy four December $45 calls. There was a small net credit of .06 cents per 1:2 spread at the open of this play on December 2. That’s what happened at the beginning of this “Money Net” Income Method: I was PAID to do the spread. Not much, but something’s better than nothing. This was a 4:8 Ratio Call Spread, a play that NORMALLY imposes infinite risk. That’s because four of the eight short calls are ‘naked’… if the stock goes up, I could get hurt… BADLY (gulp)!

That is… except for the fact that I have 400 shares of the stock on hand. Which makes all that risk go away. Whew! Cool… so, what happened next?.

By December 16, ROST had gone up dramatically. It closed on Friday at $47, up over 7% from where I got in at $43.90.

The $46.25 calls were asking .84 cents toward the end of the day. My Fusion Subscribers got an email saying, buy to close four calls at .84 cents.

Now, that seems like a debit, doesn’t it? After all, the .06 cents received on the front end don’t make up for the .84 cents I had to spend to hold on to the stock…

But, WAIT! Remember I said I bought four $45 calls, sold eight $46.25s… at a net credit of .06 cents. Now, I’m only closing four calls, spending the .84… WHAT does that LEAVE in PLACE?

Why, it leaves four long $45 calls and four short $46.25 calls. Four Bull Call Spreads. And, incidentally, they are the VERY BEST Bull Call Spreads I could ever have been paid to own (!) because with ROST at $47, they are definitely paying out their maximum amount!

In the middle of the night, “automatic exercise” happens; the online broker sees ROST at $47, and I’m holding four calls, granting me the right to buy at $45. “Automatic exercise” is also in effect, obligating me to deliver 400 shares at $46.25.

So… I get PAID the difference of $1.25 per share… a total of $500 (in the middle of the night)… without having to do anything. Cool, yeah?

Oh… and I’m still holding ROST shares which are up 7% from where I bought in.

Now, .06 cents IN, .84 cents OUT, followed by $1.25 IN equals a net .47 cent credit I get to keep. MAYbe that doesn’t seem exciting to you, but here’s the kicker: I’m getting PAID this .47 cents (about 1% for two weeks) to SIT on a stock that’s GOING UP. 7% so far. Nothing like being paid while you wait.

If I had sold a plain-vanilla covered call, I might have had to PAY OUT to hold onto this stock, but in this case got a substantial credit.

Welcome to the “Money Net”, one of several zero-risk ‘nested spread trades’ that I teach for fun and profit.

Now, if you liked how the ROST play turned out, you’ll LOVE how my play with V (Visa) ended up.

Come at 12:00 noon Tuesday to see that and a few other no-risk trades, as well as a special year-end offer on The Blueprint and the RadioActive Trading Home Study Kit.

Happy Trading,

Kurt

“Bulletproof” is that wonderful status when the net cost basis for your stock and put is LESS than that put’s strike price.

What that means is… while you are sitting on a stock that’s doing well, there is no limit to how much it can gain. On the other hand, if the market suddenly turns there’s no skin off your nose. Get it? Net cost basis for XYZ plus the $50 put on XYZ is LESS than $50. You can win, but can’t lose from there.

Can it be done? Yes, and more easily than you might think. Consider the following, actual trade that’s been posted on the blogosphere for more than five years:

September 24, 2006
Buy 100 shares DIA             $115.00
Buy 1 January 2007 $119 put   +$  5.00
Total Invested Amount          $120.00

Folks that understand “moneyness” will look at the above trade and see that the put option is four dollars in the money. That is, there’s four dollars difference between what the stock is trading for now ($115) and the put’s strike price ($119). Therefore four dollars of the put’s pricing is ‘intrinsic value’, while the remaining dollar of the put’s pricing is ‘extrinsic’, or ‘time value’.

Now, as DIA went up… the put option came DOWN. That makes sense, right? On October 19, less than a month later, DIA was trading at exactly $120 intraday. What do you suppose the value of the put option was? It was down to $2.05.

Hmmm… interesting. The put wasn’t at ZERO because there was so much time left to expiration… still about three months to go. The stock had gone up five dollars, but the put dropped by only $2.95.

Why is this significant? Well, if you recall… the “time value” of the Jan 2007 $119 put option HAD been $1… but now that the stock has gone up and even though nearly a month has passed… the time value of that put has actually INCREASED to $2.05.

(BTW, this phenomenon happens nearly every time I buy a stock and a put option that’s far out in time… and the stock goes TO or ABOVE the strike price of the put. I wrote about this in a book I call The Blueprint back in 2002.)

Now, you might point out that, though the time value of the put has inflated, the total value is down significantly. All of the put’s intrinsic value is gone, and the put is after all down in price by $2.95.

Then I would point out, “SO what? Yes, the intrinsic value of the put went away, but in order to do that the stock had to go up by at least as much. And I own BOTH.”

Ahh… starting to see where I’m going with this, Traders?

Now here’s the simple trick I was telling you about in the title of this blog post: I sold the Jan 2007 $119 put and in its place bought the Jan 2008 $128 put.

Buy to Open Jan 2008 $128 put    $9.70
Sell to Close Jan 2007 $119 put -$2.05
Net DEBIT                        $7.65

I call this play the ATM Machine. That’s because you can take money out of an ATM… but only if you first put some in! Also, because you can do this play when the stock is At The Money of the protective put.

The exciting part is this:

Buy 100 shares DIA             $115.00
Buy 1 January 2007 $119 put   +$ 5.00
Total Invested Amount          $120.00
Plus the Net DEBIT…         +$  7.65
NEW Total Investment           $127.65

Now I’ve spent $127.65… but now I am sitting on stock plus a put option that guarantees me at LEAST $128. That’s what I call Bulletproof; if the stock goes up I win, but if it goes down, so what? I cannot fail but to take more out of this position than I have ‘put’ in it. Furthermore..! Instead of 3 months to expiration, there are now 15 months to expiration. Did I mention that DIA pays a dividend? Heh heh heh…

I could bore you now with the details of what happened next… but I’d rather let your imagination run.

So, we’re Bulletproof, we’re sitting on a stock that pays dividends, and there are TEN different Income Method techniques to continue to milk this bad boy for income.

If you’ve ever come to one of my free twice-weekly webinars, you know that I give away one, two… sometimes THREE of these Income Methods. The most intriguing are the ‘nested spread’ trades that, just like the bulletproofed married put… CAN win, but CAN’T lose.

Can you imagine doing a credit spread that couldn’t possibly come back and bite ya? Heh… I can…

Hey, consider coming to one of these free webinars. We hold ‘em every Tuesday and Thursday at 12:00 noon. Today, Tuesday December 13 and again on December 15 I’ll be showing two other absolutely risk-less spread trades. Come and check it out!

Happy Trading,

Kurt

No kidding, I have a press release from a “covered call guru”, probably the best-known in his field. It’s dated October 4, 2011. In it he says that his method is ‘guaranteed effective’, that ‘done correctly’ it will ‘generate 3-6% PER MONTH returns’, and do it ‘regardless of market condition’. He further goes on to claim that people may choose to “live on the reliable monthly income”, or use these monthly returns to “dramatically compound one’s portfolio.”

Hogwash.

I’ve interviewed scores of graduates of this snake oil salesman’s classes, and many of them have lost money. Many more say they have done okay but that the 3-6% monthly returns are a gross exaggeration, and completely fall apart when you take into account the fallen value of some of the stocks they are holding, wishing and waiting for a comeback.

The internet is rife with self-proclaimed prophets that preach a gospel of reliable monthly income… all you gotta do is come to this $3,000 weekend seminar. Oh, but if you can’t make it work, you must be doing something wrong, and this $5,000 seminar will help you fix that.

Yeah, right. In contrast, RadioActive Education, Inc. has always been about educating the unfortunate consumer of these pie-in-the-sky promises what it really takes to succeed in the markets.

Hence, the “unwelcome prophet” moniker I’ve claimed for myself.

IN Biblical times, the prophet Jeremiah was committed to speaking the truth… and that truth was not popular with the parties in power or the people. Jeremiah’s immediate reward? He was lowered waist deep into a sewage container and left for three days.

YUCK! Well, while I don’t deal with problems like his, I still have some things in common with the weeping prophet. For example, it seems that few want to hearken unto the real truth… but I can’t help myself and feel compelled to keep speaking it.

Recently a great looking trade with POT came up, and some pupils of mine and I both got in.

Hi Kurt – You had asked me to keep you appraised of my RT trade in POT. Here is my closeout report.  This is an excellent example of how [RadioActive Trading] protects you when, despite all my due diligence, my research into the high marks on both fundamental screens and technical screens, and good option characteristics, a trade goes sour. -Dom B.

At the time of entry, POT was on top of several fundamental screens that I use, including some top numbers from Zacks. We entered at a price of $56.59, and purchased a married ‘put’ for protection.

I wanted to point out something from the above post. Dom stated correctly that if if he had simply entered the stock on the technical’s and fundamentals alone, he would be looking at a 28% loss. Instead, he only had a two-point-eight-something loss… one-TENTH of what it would have been without the protective power of a properly purchased put option.

What if we had entered this position with an October 2011 covered call trade? There would certainly be a little bit of premium collected… but at the end of a month… the 6% return we were promised looks really a lot like a 20%+ loss.

It may be unpopular to acknowledge that losses happen… oh, after all, we all make 3-6% every month, compounded, don’t we? To talk about controlling losses as THE most important part of the trading process is to bring them to the forefront of our thought. And we don’t like to do that.

But more and more enlightened individuals are embracing the fact that this or that 6% gain is nothing to brag about whilst you are sitting on a 28% loss in one of your stocks.

Think about it, those if you that are ‘compounding your stock earnings’… 6% per month compounded is a 100% year over year gain. That means that if you started with $100,000, you may now liquidate your account for $200,000.

Oh, and 6% compounded monthly happens regardless of market direction, right? So I wanna see the bank statements of those guys that made $100,000, starting with $100,000… trading covered calls in 2008.

What? Not even a nibble? NO ONE can step forward and show you that? Then quit giving up ten times what The Blueprint costs for a weekend seminar that will make you feel good for two days, then leave you empty when it comes to real answers.

Dom and I, we’ll be trading our accounts with protection so that when a gain comes along… we KEEP it. ’Nuff said.

Happy Trading,

Kurt

P.S. Come on folks… let’s put the gurus to the test.