I’ve decided that rather than bragging about MY plays, I’m going to start almost exclusively bragging about the plays of my Students.

This latest comes from Tom, who has been sitting on shares of XEC at a low cost basis for YEARS. Tom has shared the numbers with me and made them available for instructional purposes. I’m posting it here because I suspect there may be many more Traders in the same shoes as Tom: Having shares of stock that are UP… but no guarantees about the future.

This answers the problem that faces anyone that’s holding onto a stock that’s up from where they bought in. What’s a trader to do? We could sell right now because today’s price might be as high as it ever gets… or maybe we should NOT sell because after all, it’s gained so much, might it not just keep going up?

Hmmm… sell now and cap gains… hold instead and perhaps watch those gains go away…

NOT cool. Fortunately, there is a solution.

Here’s a TALL order… let’s say that Tom wants to:

• 1) Bulletproof his stock, meaning that if it goes down, his investment does NOT lose value;
• 2) continue to have an unlimited upside potential anyway;
• 3) continue taking dividends on the stock, and
• 4) turbocharge that income to receive even more than the dividend…

…can it be done? I mean, we might prevent losses by buying a protective put option. But that SPENDS money, doesn’t it? OR, we could generate some income by selling a covered call. But..! Then that would cap the potential upside. We’d be obligated to deliver the stock if it goes up.

SO, this is what Tom and I came up with. It’s pretty astounding, and covers all four of the above goals. He CAN’T lose, but CAN gain more than where he’s at now… and get paid two ways while doing it. Ready for this? Check out the following risk/reward graph:

Screen courtesy of PowerOptions Free Trial www.poweropt.com/rat

It kind of looks like long stock, doesn’t it… with no limit on the upside as the stock’s price moves. Notice anything interesting? Here’s a hint: notice the distinct lack of a break-even line. Tom’s stock is in BULLETPROOF status: He can’t possibly lose any of his investment, no matter what bad news befalls the company or the market in general.

See, the RadioActive Profit Machine setup uses an in-the-money put option. But..! Because Tom’s stock was already up from where it had started when we met… rather than coaching him that he might buy an IN-the-money put option, I pointed out that an out-of-the-money put right now could lock in a return that’s higher than his original cost, PLUS the expense of the put.

Of course, as we’ve mentioned before, Tom would like to TAKE income for holding onto XEC, not pay for the privilege. Well, I’m not finished. Look at the PowerOptions (www.poweropt.com/rat) Custom Spread entry that resulted in the above graph:

Screen courtesy of PowerOptions Free Trial www.poweropt.com/rat

WHILE paying $3 for a September $70 put option, Tom also received a $1.80  credit. See, besides picking up a long put, Tom also sold a Bear Call Spread against his stock. That credit helped pay for the put. The put is LONGER term, and the spread is SHORTER term, so he’ll have the opportunity to do this spread more than once.

Now in the case of a Bear Call Spread, the last thing you want to have happen is for the stock to go up. You might end up owing more than you collected. Hmmm… but not in THIS context, because Tom also OWNS the stock.

When you own stock and it goes up, that’s not a bad thing. This Bear Call Spread has generated income with NO risk. Should the stock stay down, Tom keeps his full credit for selling the spread. If it goes up, the increase in value of the stock will more than offset the losses of selling a bear call spread!

In “short”, Tom cannot lose with this play, where before he was at the whims of the market whether his stock would retain value or not.

Let’s fast forward a few weeks after our first coaching session:

Today Tom is closing the short $80 calls on XEC. When I got off the phone with him just now, the ask was .20 cents.  He’ll leave the long $85 calls in place in case of a serious rally, and to save on commissions, but essentially he has ‘banked’ $1.60 per contract.

I’m pretty impressed with where Tom is right now: He has paid for more than half of his ‘ stock insurance policy’ (the $3 for the September $70 puts). He may now look for another spread opportunity. Because XEC has faltered a little bit, the September puts are worth more now than he paid for them, which is a bonus.

After the dust clears and (if) XEC goes up, Tom may be able to do another RadioActive Trading strategy that will not only keep his stock BULLETPROOF… but the market will also pay him to do it. I’ll keep you in the loop on that!

In the meantime, here Tom’s story so far: He has purchased September $70 put options as an insurance policy for $3 apiece. He opened Bear Call Spreads with ZERO RISK… because those spreads were done in the context of owning the stock in the first place… and has closed them so that he has banked $1.60 (at least).

Tom now is STILL holding long August $85 call options that may or may not be worth something soon… and has reduced the cost basis on his insurance policy, which is now worth more than he paid for it anyway. He has seven weeks to use one or more of the TEN RadioActive Trading Income Methods to pay for the rest of his ’stock insurance policy’ and is a happy trader. I’ll keep you posted.

Happy Trading,

Kurt

Often, you hear the saying “Practice what you preach”. In my case, the thing that I have preached and caught myself NOT practicing recently is the use of affirmations to instruct and program my mind for better trades.

I know, I KNOW! Some of you guys out there might be rolling your eyes… like I have… at the “positive thinking”, “new agey”, somewhat psycho-babbly idea of repeating sentences to one’s self in an effort to somehow get centered in the universe.

Sigh.

Well, I think it’s silly too. So silly that I often overlook its power and effectiveness. Now, don’t get me wrong… I know better than to think that by repeating phrases over and over to myself, that I can actually make a stock’s price go up or down. That IS silly. But what affirmations CAN do is condition your mind to make better decisions.

Think about it: WHAT exactly makes the difference between a poor trader, a good trader, and a GREAT trader? Why, nothing more or less than the decisions that they make. Bingo, presto. You can’t become a better trader by having a better system. The system guides you, yes… helps you recognize good opportunities… filter out bad ideas… gets you in and out according to specific rules… but ultimately it’s not the system that makes you successful.

It’s YOUR actions that make you successful. Or Unsuccessful.

And actions are determined by what you believe.

And what you believe is deeply affected… by what you say.

I’m going to relate an embarrassing story from my childhood: the first lie I ever remember telling.

I had watched my Mom put my favorite cookie, Lemon Coolers, into a canister on the table. I asked if I could have one then, but the answer was no. “It’ll ruin your dinner,” she said.

SO, sneaky me… I went back to playing with my toys. Once Mom walked out of the room, I got out a stool, got up onto the counter, and raided the cookie jar!

After putting the lid back on the canister, I got down and went back to playing with my toys. My Mom walked back into the kitchen and saw me sitting on the floor in the living room. Noticing the white confectioner’s sugar all around my mouth and on my hands, she asked sternly, “DID YOU GET INTO THE COOKIES I TOLD YOU NOT TO EAT?”

“Um, NO!” I said, feeling blood rise to my face and guilt fall over me like a blanket. “There was this man… HE came in, and HE ate the cookies. I tried to tell him he wasn’t allowed to do that.”

My Mom was stuck between laughing at my obvious lie and doing what she thought a good mother should: spanking me for disobedience and for lying. While she hovered there, I quickly added, “He was a tall man so he didn’t need a stool to get on the counter.”

My Mom brought my Dad in and told him a “man” had stolen the cookies. My Dad looked at me, amused but also concerned… and I went on. “Yes, he was kind of big or I would have stopped him.” Both of my parents were on the verge of laughter but I laid it on thicker and heavier as I went. “He came in this door, but he went out that door. Maybe you can still catch him, but maybe not because he had a good head start.”

I have a clear memory of all this but I figure I was only about four years old. Now, here’s the deal… By the third or fourth time I referred to the “man” that had stolen the cookies… I was starting to believe exactly what I was trying to get my parents to buy. I “saw” the man, dressed in a black leather coat and with a beard… running away with the cookies in a burglar’s sack draped over his shoulder… heading into the next neighbor’s house for another easy haul and an innocent kid there to blame for it.

So, end of story: my parents were good ones. They DID finally say, “There was no man, and you’re in more trouble for lying than for taking the cookies.” I got the spanking I deserved and the lesson I needed. But I didn’t write today just to embarrass myself or my parents with this story… I’m writing to illustrate a great truth. This truth is one of the great keys to changing your thinking and ultimately your life.

See, it’s a fact that if you tell a lie often enough, you’ll start to buy it. It’s a curious effect of the human mind that what we say often enough, we begin to believe. Unlike Bart Simpson, who writes sentences on the blackboard at the open of every show, but NEVER changes his behavior… Real human beings are programmed by their own words. What we say, we believe. And our beliefs shape our behavior, our relationships, our performance in every category of life.

I’ve got a crazy idea. If telling a lie often and fervently enough makes you begin to believe it… why not try telling ourselves the truth often and fervently? Why not shape and guide our own beliefs, replacing those that limit and frustrate with better ones?

That’s all that affirmations are. They are repeated statements with the intent of reprogramming our thinking and therefore our habits. For example, if I know I need to exercise patience more in my trading, it would make sense for me to say something like this to myself, fifty times a day:

“I am learning to delay gratification. I am getting better at sitting while a trade develops rather than trying to force a result. I can’t make a stock do what I want but I can decide how I’M going to act. The stock market sorts money out of the hands of the impatient and into the hands of the patient. I deciding to be more and more that kind of person. I am more patient today than yesterday, and I’ll be even more patient tomorrow than today.”

If I knew that my problem was in making decisions, I might say:

“More regrets come from indecision than from bad decisions. I am not hasty but I don’t get stuck either. Once I’ve thought something through and have the best decision with the information I have now, I don’t worry anymore, nor do I wait. I will be wrong sometimes and that’s okay. But the MOST wrong thing I might do is to delay a decision so much that the decision is taken from me or made for me. I can act. I will act. I will act more and more confidently each day.”

Now, whether those things feel like the truth (at first) or not, what’s the harm in saying them? IN fact, the more we repeat empowering things like these to ourselves, the more likely we are to be affected by these powerful statements than by the cycle of self-fulfilling prophecies we COULD be stuck in instead.

Hey, you use affirmations all the time whether it’s on purpose or not. These affirmations reinforce our beliefs and our habits. The difference between defeating beliefs and empowering ones is paying attention to WHAT you are saying.

The next time you catch yourself blowing it and then saying, “I should have known. I ALWAYS do something like that”… maybe you could alternatively say, “I blew that because I put too much at risk in that trade. But that isn’t like me. No, I weigh the possible rewards against the worst possible outcome and don’t ‘pull the trigger’ unless I’m sure that I have the right proportion of risk to reward. I’m learning more and more about balancing that. In fact, soon I’ll be one of the best in the world at calculating risk, staying out of trouble when I’m wrong but leveraging great returns when I’m right…”

And so on. Hey, look! It can’t hurt. I know that when I’ve had the best trades in MY career, at the time I was saying empowering phrases like that to myself.

Your mind controls your decisions, and your decisions control your destiny. Let’s begin to purposefully feed the right kind of beliefs to our minds.

See you out there! Happy Trading,

Kurt

A: Let’s take a look at a comparison between the Jan 2012 $60 call, and the Jan 2012 $60 married put.

The $60 call is trading at $6.00 X $6.50. You could probably get ‘in the spread’ with a limit order, but you probably won’t get it low as $6.00… maybe more like $6.20 or $6.30. With me so far?

The risk, then, will be that you could lose as much as $6.20ish.

Now let’s look at the married put. ESRX is trading at $53.15, and the Jan 2012 $60 puts are $12.20 X $12.60. Again, if you get in the spread, you may be able to pick up the put for $12.40 or so.

Now let’s do a little math:

See that? You’ll pay more for the married put than for the call, but the AT RISK amount is different. $5.55 versus $6.20 or so.

Here’s why that is significant: there are many, many self-proclaimed options gurus out there that say that a trading a long call is IDENTICAL to trading a married put… but the call is cheaper and therefore ‘more efficient’.

Hmmm… strange to say that two ‘identical’ things are the same but different… but I digress from correcting their math to correcting their English. Ahem.

The reason that there is a different dollar amount AT RISK is that the options’ pricing reflects what the rest of one’s capital is doing. The Black-Scholes equation ASSUMES that someone trading a long call HAS the capital to buy the stock; he just declines to do so. Instead, he buys a call AND..! This is important! He takes his remaining capital that WOULD be used to buy that stock and instead deposits it at interest.

Enter the risk free interest rate. The difference between the AT RISK amounts in the married put and the long call is what the same money could earn at risk free interest.

Here is where understanding the impact makes a difference: Position Sizing. If one has, say, about $10,000 of capital to trade and has a bullish expectation on a $45 stock, he may get 200 shares of XYZ plus 2 $50 put options and now his capital is spent. Of course, he can only lose the time value portion of the puts, which make his AT RISK picture pretty conservative, while retaining unlimited upside potential.

On the other hand, the temptation is to take that same bullish expectation, look at the pricing and leverage of long calls, and pick up twenty contracts because, after all.. that’s what we have the money to buy. It’s this human nature problem that gets folks into trouble: using the highly leveraged instrument that a long call is, without respect to the fact that it’s intended to be accompanied by a corresponding amount of capital that we DON’T put AT RISK.

Got it? The risk free interest rate affects pricing of these two instruments. Some will argue “but that can’t be… because in an efficient market, you can’t have that kind of disparity in pricing.” Yes you can. You COULD buy a married put, short the same month and strike calls, and make an ‘arbitrage’ profit… but in the end all you have done is solve Black-Scholes for the risk-free interest rate. The same result is attainable by buying T-bills.

Why do I advocate using married puts over long calls? Because position sizing is figured out FOR you… plus you have the opportunity to sell calls and spreads against that arrangement with a lower trading clearance.

A: If you are looking to liquidate a Married Put position and the put still has a few months to expiration, it will always be better to Sell to Close the Stock and Sell to Close the Put, rather than simply exercising the Put option.

Why? An Option price consists of two parts: Intrinsic Value (how far In-the-Money is the option) and Time Value (the premium priced in to the option for the days remaining to expiration).

The option should always be priced at least at the Intrinsic Value. For example, if a stock is trading at $35.00 per share, the $40 strike put for that stock must be priced at least at $5.00. If the option was priced below $5.00, there would be an unfair advantage in the market.

Now, if the option expires next month, the $40 strike put may only be priced at $5.50 or so. $5.00 of that price is the intrinsic value, $0.50 is the time value. A $40 strike option on the same stock that expires 6 months out in time may be priced at $6.50 or so: Again, $5.00 of intrinsic value and $1.50 of time value.

Let’s say that I am in a Married Put position with the 6 month out option. If I exercise the put option, I only receive $40 into my account. However, if I sell to close the stock and sell to close the put option, I would receive $41.50 in my account ($35.00 for the stock, $6.50 for the put option).

If I am holding a position where the put expires in a couple days, most if not all of the time value will have decayed out of the option. If it is Thursday before an expiration date, and my put expires this month, my $40 strike put on a stock trading at $35.00 per share may only be valued at $5.10 or $5.05. In this case, I may simply exercise the put as I would only receive $0.05 or $0.10 more for liquidating the position.

They always say, “Wow! I never knew you could do that.” I know. A lot of people don’t know that you can absolutely protect your stock from loss and get paid to do it. But it’s true. And I run into people all the time that are in a position to do exactly that: buy an insurance policy so that their stock never, EVER loses ground… and have the cost of that insurance handled, even get paid to do it. I love telling people I meet about this fact.

So, here’s the latest incarnation of that conversation. yesterday I was on the air with my radio program, “It’s YOUR Money“. The regular producer, M.T. was not available but right before the broadcast he introduced me to the man that was going to run the program for me.

It was a great show. Afterwards, the stand-in told me that he had been given shares in a publicly traded, optionable company as a company incentive. It wasn’t a huge amount, mind you… but enough that if he bought a few more shares and a put option, he would have a BULLETPROOF investment.

For those of you tuning in late to the RadioActive Trading convo, “Bulletproof” is the term I use when the net cost basis of your stock and a put option protecting that stock… is lower than the strike price of the put.

Of course, from this platform, you can do as many as TEN different “Income Methods”… ways of extracting cash from the position without necessarily selling stock… and still have a riskless proposition.

Back to the producer. I opened up my PowerOptions account (www.poweropt.com/rat for a free trial) and showed him the graph of a bulletproof position: 100% upside potential, 0% risk.

When I got to the part where he could BE bulletproof, TAKE income, AND… and this is a big and… he could also STILL have an unlimited upside potential for growth, he had a great question for me.

“Shoot”, I said.

“Why doesn’t everyone do this?”

I told him I was trying to change that.

If you are one of many people that are sitting on a stock that’s UP from where you got it… and don’t want to sell too soon… but also don’t want to feel like a chump if the market tanks again and you give back all your gains… OH! AND you would like to take a little bit of cash flow from your investment, right now, without selling…

…check out the continued conversation here.

Happy Trading,

Kurt

If you want to join in live, just go to castlerockradio.com every Wednesday at 12 noon Eastern time.

Here are links to the archives… (you can use these as podcasts as well, if you don’t have the time to listen now but want to take them with you on your iPod)

Its_Your_Money_4_14_10.mp3

Its_Your_Money_4_21_10.mp3

Its_Your_Money_4_28_10.mp3

Its_Your_Money_5_5_10.mp3

Its_Your_Money_5_12_10.mp3

(that’s a d@mn lie… everybody that says “I told you so” says it with at least SOME relish…)

…but I have after all been saying for eight years now how important it is to use put options, specifically married puts with stock, to make a stop that REALLY works. An exit plan that actually behaves properly.

See, “stop” orders fail miserably at doing what they are intended to do: “STOP” the hemorrhaging when your stock goes against you, and keep you safe.

Feel safe? Did yesterday help? Of course I’m talking about the PLUNGE of Wall Street, in which it fell nearly 1000 points… 650 of those points in just a ten minute period. If you were trading with stops, the term “Black Swan” means something real to you now. That swan swooped in and TOOK you out of a position with a certain amount of pain, pain that you need never feel again.

So why use a put option to control your losses instead of a stop order? Here’s what stop orders really do: they leave you at the mercy of the lowest bidder and get you out at the worst possible price.

Most times, that’s just plain annoying… and I KNOW you’ve had this happen because I used to deal with it… the “stop” order you have in place gets filled as a stock vacillates. THEN, the stock gets a little moxy and heads for the moon. Only it does so without you. So your “stop” order has not only cost you commissions and capital losses… it also incurs the opportunity cost of taking you out of a good play just before it begins to win.

Other times, however, a “stop” order takes it to the dark side. If your stock is hammered hard in heavy volume, you can be sure that the price at which you set the stop will NOT be honored.

I once was long a stock at $38ish and the day after earnings it opened at less than $25. OUCH. Well, big ouch for some folks, little ouch for me because instead of a stop order I owned a put option.

Those other poor souls that were buying that stock on that day… and were thinking that a “stop” loss would STOP their LOSS… were sadly mistaken. A $38 stock with a 10% stop would mean that you’re only risking $3.80, right? Well, not with a sudden downturn. If the stock goes quickly to $25, or worse yet, GAPS at the open while you have a stop order in place… well, you get out at $25. That’s how the portfolio cookie crumbles.

The reason that I have advocated using a married put for eight years now is that your maximum possible loss is PREDEFINED… and if you do it MY way that predefined maximum risk is down in the single digit range. Plus you have absolute control. That means that YOU decide when, and IF, to exercise your put.

Know what happened with me yesterday when the market bounced so erratically? Well, after yawning and switching to the sports channel… mostly nothing. Why? Because my exit was already locked in and I had zero worries. IN fact, I placed a little bear call spread that actually added zero risk!

This was because I was both long on the stock and short on a call spread. If the stock goes down, my put and bear call spread gain in value. If the stock goes up, I’ve received a credit on the spread and get to add capital gains in the stock to that. An added bonus is that the increased VIX inflates the premium of my put option as well!

If you’ve been annoyed… or HURT… by the failings of stop orders… let me tell you that there is an alternative that solves BOTH of the worst problems. It’s the married put, applied properly and according to the principles of The Blueprint.

Happy Trading,

Kurt

1. An invite to the twice-weekly live trading Webinar,
2. A trading lesson about mental stability that is sure to change your life if you ‘get’ it, and
3. Links to two very brief videos that will entertain AND teach one of several ways to take a trade from low risk to NO risk.

Ready?

Today I’d like to chat a little bit about those two tiny gremlins that steal your money and wreck your trading…

FEAR and GREED.

Before we explore how to exterminate these little fellers forever, let me invite you to take a look at one short, 3 1/2 minute video. This video will not show the mechanics of “BULLETPROOFING” your stock… like my free Webinar held every Tuesday and Thursday at 12:00 noon EDT does… but it WILL show the effect that bulletproof trading has on your attitude.

Check out that vid here: http://www.youtube.com/watch?v=wDYXe9d6HEg

Now on to today’s lesson. You know these two inescapable facts already if you have been trading for ANY length of time…

You know that FEAR causes you to pull the trigger to soon or too late, and end you up with a losing trade.

You also know that GREED causes you to ignore warning signals and do trades that put too much AT RISK, in hopes of getting an outsized return. Result? Losing trades.

Actually, the very WORST thing that could happen is that your fear or your greed DOESN’T lead to losses right away… the worse thing that could happen is that the market actually goes your way just after a fearful or greedy decision… because that will reinforce the behavior… which you’ll then KEEP DOING…

… and will lead to your eventual ruin. Decisions made out of FEAR and GREED will eventually take you and your account down in flames.

Now, like I said… I’m not telling you anything new. If you’ve been trading for any length of time now… you KNOW this. Perhaps painfully well. What you may not know is how to conquer both fear and greed and use something else to win.

Ohh… I just gave you the key… USE SOMETHING ELSE to win.

Nature abhors a vacuum. Your mind abhors the absence of thought. You cannot erase greedy thoughts for long… they will return and ruin you. You can’t ignore fear and be reasonable… before long your irrational behavior will sink you.

Well, gosh durn it if I say you can’t ignore or erase fear and greed, what CAN you do?

Easy. REPLACE those thoughts.

I said easy… and I mean it… although, like any habit it will take time. You have to work at it, something only 2% of traders ever even know HOW to do… and fewer practice.

With what shall we replace these self destructive thoughts?

Well, FEAR is most easily replaced with a healthy curiosity. Instead of anxiously looking forward to what may or may not happen, we approach our trade with a sense of wonder, awe… and childlike expectation. Expectation of a lesson, nothing else.

This is easier when you trade RadioActively, because even if you are waaaaay wrong about the direction of a trade… if you put it together correctly in the first place you can only lose a maximum of 5-8% in that particular trade, and only 1% of your overall account.

Wow, it’s a lot easier to think clearly with 99 of your marbles still intact, hmm?

So the lesson is not to erase, but replace. Fear is replaced with curiosity. And the best way to accomplish that is to use a structured trade only CAN lose a tiny amount, but can also win an unlimited amount. That is the unique situation that you enjoy with a married put arranged so that you can only lose single digit percents, but the upside is left open.

TODAY, after earnings, CREE will either swing sky high… maintain course… or crash crazily. I don’t care either way because of my situation, having a married put in place. The best part of this married put is that the cost basis of the stock and the put combined is a figure that’s LOWER THAN the strike price of the put. In other words, I have unlimited upside in case CREE bolts up, up, and away… but no fear at all. Just a healthy curiosity about what will happen next.

BTW, to take a look at the video in which I discuss the mechanics of WHY I am bulletproof with CREE, click here: http://www.youtube.com/watch?v=Sb771wmysbA

If I replace fear with curiosity, then with what shall I replace GREED?

Why, REASON of course.

Look, I’d love to expect CREE to double in the next few days following the earnings announcement, but that isn’t very likely to happen. If it does, bully for me, but I am set to get out shortly after earnings.

My GOAL is to get out with a double digit (10% or more) gain on my investment. If CREE shoots up to that level after earnings, I’ll bet out then, NOT hang on for more, more more. That’s how countless people have ended up watching a good trade turn around and go bad. Not that mine can go TOO bad, seeing as I’m bulletproof… but you know what I mean.

Listen, I’m getting out of CREE probably by Friday or sooner, whether it has a bump up or not. I may miss a big move, but I may also miss a retrace. It’s just… REASONABLE… to say that whatever big move CREE has in store, I should get out when it reaches 10% and never look back.

Of course, if the market says CREE is up 14%… well I’ll have to not argue and just settle for that.

Okay, Here we go again with another webinar today at 12:00 noon EDT. I honestly don’t know what we’ll be covering today exactly, because with TEN Income Methods and scores of PowerPoint slides describing actual trades of mine… the content can be improvised on the fly according to the needs of the people present. Got a question you’ve always wanted to ask about limited risk, and NO RISK trading methods? Pose ‘em to me LIVE. I’ll show you a current example of both winning and losing trades of mine, taken from the unedited archive of the last three years.

Okay, gotta go now. Check out those videos. And make sure that yours is…

Happy Trading!

Hi gang! I recently got off the phone with a local (MY state) options trading enthusiast. All over the Denver and Colorado Springs areas there are groups that offer support to users of VectorVest, OptionVue, and other firms dedicated to teaching the public about trading options, then selling them the tools to do it. (I personally prefer a cheaper and better alternative at http://www.poweropt.com/RAT/ )

Anyway, some of these local groups look for guest speakers at their events. When a friend of a friend suggested that I talk with a local, veteran options trader… Dennis… I left a message on his phone a couple of weeks ago, then forgot about it.

Dennis is a busy man, like most successful people are. So I didn’t expect a return call any time soon, if ever. But he did follow up. Yesterday Dennis gave me a ring to check out what I might say to his group in case he did invite me to come. In response, I invited him to check out my twice-weekly webinar, The RadioActive Trading Methodology.

If you’ve never been, here’s a summary: Twice a week I teach (for free) the RadioActive Profit Machine… a very specific arrangement of stock plus a far-out-in-time, in-the-money put option… as well as one or two of a number TEN “Income Methods”. The IMs are my name for adjustments to a married put trade. These adjustments mostly spread trades, nested WITHIN the framework of the married put. These adjustments are designed for taking money out of a married put (without selling the stock) or lowering risk, or both.

After watching the webinar Dennis was quite impressed. He said, “WHERE IN HECK WERE YOU LAST WEEK??”

During the webinar, I had shown a comparison between covered calls and married puts, as well as one of the several ways to take money out of a “bulletproof” stock without putting a limit on the upside. Coincidentally, Dennis had just that same week been let down, in BOTH of the ways that a covered call trade can let you down.

Dennis had been trading covered calls on two BioTechnology firms. He got hammered by one when it gapped down… and to add insult to injury… he didn’t realize anywhere near the gains he might have when the other stock he was playing went waaaaaaay up.

That biotechnology, by the way, was ITMN… up about 140% since this time (March 11, 2010) last week. Dennis had sold an in the money covered call. Awww, man. Yes, Dennis DID make a little bit of bank when he got assigned… but not nearly what might have been, had he only put on a married put instead of a covered call. On the other hand, one of RadioActive Trading’s clients (”Bill”) was long 1000 shares of ITMN with ten puts for protection, keeping his risk manageable and small while playing for big gains…

Hmmm. Who do you think was happier after ITMN blew up? The guy with short calls against… or the fella that went in to the FDA approval announcement having a great night’s sleep with a tiny amount AT RISK, and blue skies for the stock’s meteoric climb? Give ya three guesses and the first two don’t count, my Dad used to say.

Being an experienced spread trader, Dennis could see the benefits of RadioActive Trading immediately during the webinar. He really did mean it when he said he should have seen my presentation a week before. Well, Dennis is now purty excited to have me come and talk to the local options trading group. That’s something I really enjoy doing on a limited basis, and I’m happy to share. It seems every time I do, I get to rub shoulders with guys smarter than me and I get to learn a thing or two as well. I know I’ll learn a thing or two from Dennis!

I’m looking forward to this upcoming speaking engagement with seasoned investors as well as newbies. Dennis and I had some good laughs on the phone about how some folks take an Optionetics class, or go to a weekend Rich Dad seminar… and come out on the other end with $5K in capital to trade and ready to quit their day job.

Hmm. Not gonna happen, folks. But what you can do, right now… is learn to develop a positive expectancy system for your trading, stick to a set of rules… and above ALL, use options to MANAGE your RISK in a trade.

Dennis is no slouch at trading. He regaled me with the story of how he turned a stake of $300K into $1.6 MILLION in just about a YEAR…

…but also, how he ended up LOSING $1.1 million of that in a matter of a few DAYS.

I was thinking to myself, “Well… still. That’s $300K to $500K in about a year. Still pretty good.” But Dennis pointed out to me that he had been so highly leveraged that he was lucky to get out with a net gain in that time. He jokingly… or perhaps not so jokingly… told me that he was just a step from sleeping under a bridge at one time. The margin that Dennis was using exposed him to losses around $4 million, had things gone further south. Good thing that this little adventure of his happened years ago instead of during October/November 2008, eh?

Yes, big risks can make for big gains. But they can also allow for some spectacularly crushing LOSSES. Dennis is one of the few that grasp this and had the nerve and the smarts to stay in the game, but with more conservative trading. As the saying goes, “There are bold traders and old traders. But there are NO old, bold traders.”

After this, Dennis and I talked about how most options trading education out there is simply about the mechanics of a play, and almost NONE of it is about the things that really matter. We talked about expectancy, psychology, position sizing, a written trading plan… the really important components of a complete system.

After taking a look at the real trades I’ve done with the RadioActive Trading Methodology… but more importantly, the PRINCIPLES that it’s based on… Dennis told me that using a married put is one of the smartest things you can do because it predefines your risk, yet leaves your upside open… and then you can do trades nested within the already protected trade. Like the RISK-LESS bear call spread that I demonstrated in that particular session.

A half hour after beginning my follow-up phone call with Dennis, I hung up the phone… simultaneously humbled and encouraged. When a man that rolls $300K into $1.6 million tells you that the way that YOU’RE trading is pure gold… that’s something. Now, I still have quite a ways to go because I’m constantly working on my systems and on myself to become the best trader that I can be. I know that when I meet with Dennis and his group, I’ll have a bunch of questions about market psychology and other things that I need a better grasp of.

Dennis has said that he will be “an open book” and share anything that he can with me, as he does for the members of his little options trading group in Colorado Springs. Since he’s achieved an honorable level of success as a trader, I’m going to definitely take advantage of that offer. I hope to have the caliber of character and accomplishment that Dennis has had during his career. In the meantime, I am happy and humbled to have something to offer in return.

“Aren’t protective puts EXPENSIVE?”

Well… yes and no. I mean, they do cost money. The question should be phrased more like this: “Are protective puts WORTH what they COST?”

Better question, I think. Because guess what - the benefits FAR outweigh the costs. Plus, the put option may actually become a source of income…

IN the meantime, consider coming to any of our twice weekly Webinars. We’ll show three ways that the put can actually be a source of income in a married put trade.

The Blueprint contains ten income methods for taking money out of a married put (protective put) trade… five of which DEPEND on having a put in place already. But even without going into the fact that you can take income from married put trades in unique ways that manipulate the put option, let’s consider just the merits of trading with protection.

Everybody knows this about insurance and lawyers: better to have them and not need them, than to need them and not have them!

No reasonable person reading this post would invest in a piece of real estate that wasn’t insured. No bank would loan on a house or car that wasn’t insured. No business owner in his right mind would conduct business without at least liability insurance. So… what’s the big fuss about using puts to protect stock? I wouldn’t even THINK about trading without them.

Consider the two situations below. They are both true stories. One shows a losing stock with a put added and how it saved my bacon… and one shows a winning stock with a put added, and whether or not that was wise.

DRIV. I get into Digital River at $38.53. At the same time, I pick up an insurance policy… an in-the-money, Jan 2010 $45 protective put. What’s my expense? $9.20. “Wow”, you night be saying. “That’s a LOT.”

Is it? Hmmm…

October 12, 2009: DRIV GAPS down from $40.42 to $25.12 overnight… keeps heading down to a low of $23.82. It still has not recovered as of this writing in late February; DRIV is in the mid-twenties. Cost of trading this issue WITHOUT a protective put: $38.53 - $25.00 = $13.53 per share. That’s an overnight, over 35% gap.

Let’s compare that with the cost of the Jan 2010 $45 protective put. YES, I spent $9.20 for it… but I was always guaranteed to get most of that back. It’s like money in the bank. Look here:

DRIV stock per share $38.53
Cost of protective put +$ 9.20
Total Investment $47.73
Guaranteed Exit Price -$45.00
Total Amount AT RISK $ 2.73

See that? While it APPEARS as though I’ve SPENT $9.20 for the protective put, in truth I’ve only parked it for a bit. Most of thst value of that put is stored, intrinsic value that I’m guaranteed to get back.

And I did. SO, while some folks were licking their wounds, wondering where their $13.53 (35%) a share went, I was okay losing $2.73 (5.7%) and going my way looking for a winner.

Let’s look at this in terms of value: $13.53 loss vs a $2.73 loss is a $10.80 difference. Do we still think puts are expensive?

Well, maybe that’s not fair. Maybe you were thinking more along the lines of, “Hey, I usually pick winners. SO using a protective put would needlessly cut into my profits!”

Well, okay. Since you have a crystal ball, I guess you never need a protective put. But! Let me tell you about this one anyway:

CREE I got into CREE at $51.73 a share and simultaneously picked up a June 2010 $60 put for 11.60. Let’s use the “five lines” RadioActive Profit Machine setup again:

CREE stock per share $51.73
Cost of protective put +$11.60
Total Investment $63.33
Guaranteed Exit Price -$60.00
Total Amount AT RISK $ 3.33

SO… On January 19, we’re expecting an earnings announcement just after the bell. Brigantine Advisors CUTS its rating of CREE from Hold to Sell during the day. I decide to hold anyway, having less than a thousand bucks (I bought 300 shares and 3 puts) AT RISK.

Know what? One of my clients had bought CREE earlier and got puts at a better cost basis. He was going into this earnings announcement BULLETPROOF… meaning that the combined cost of his CREE shares and his protective, $60 puts was LESS than $60. He couldn’t lose!

SO the announcement comes out and it’s GOOD. Next day, CREE shares shoot up to $63.95. It’s been going up since. Let’s look at the collective position today:

CREE stock per share $65.40
Value of protective put +$ 3.80 (bid)
Total Value $69.20
Original Investment -$63.33
Total Profit if sold now $ 5.87

Wow, a $5.87 per share gain instead of a $3.33 loss. There’s a skewed risk/reward picture, the only kind I like to trade. Now, sure… I know that if we didn’t have the put in place, the profit would have been bigger…

…but who has the intestinal fortitude to hold CREE through the earnings announcement… with an analyst downgrade during the trading day before said announcement… especially if he played DRIV recently and it dropped 35% overnight?

I’ll tell you who… I would. So would my client that called after the announcement and said, “Thank you… RadioActive Trading has changed my LIFE!” This because he was able have NO WORRIES after the bell, being long on a volatile stock with so much buzz on both sides. Up til recently holding positions overnight was stressful, but not any more. He was BULLETPROOF.

Actually, because of the “Income Methods”… adjustments that I’ve made to the position at a credit… my CREE position is bulletproof as well. That means I still have the upside way open, but no risk at all left in the trade. It’s going to make for a very peaceful night of sleep for me before CREE’s next earnings announcement in April.

Only my Fission‘ Members get to see the details of how I bulletproofed CREE using the ten Income Methods of The Blueprint… but you can check out a “virtual” CREE position by going to the Plain Vanilla Portfolio on http://www.radioactivetrading.com.

Okay, gang, fire away! Tell me what you think about trading stock with an insurance policy… the “married put” or “protective put” position.