How to Take the Risk out of Spread Trades

hello gang this is Kurt Frankenberg your host and I'm joined by my super cool good-looking co-host mr. Mike chovka how's it going Mike well things are going pretty good Kurt getting a day closer to expiration there so a lot of activity and management of positions adjusting of positions and small laments on one or two positions as well sir happy day I'm I happen to be in a position right now that's just about bulletproof and I think it's going to be before before the 30th when they're gonna have an earnings announcement so okay I'll let folks know how that goes on the blog so uh anyway well folks I'm really excited to see and today as promised we're going to be showing some some really interesting stuff I'll be showing some riskless spread traits and I'm gonna ask you to get the most out of today's free webinar I'm gonna ask you to jot down your questions as you think of them and if the question gets answered by way of the you know the class itself then great that you'll you'll have your answer it will be cemented in your mind and and that'll be just super and if the question is not answered by the class itself why then we're gonna have a couple of breaks a couple of places where we'll stop and and ask you know allow you to ask questions and then Mike and I can respond and in just just that will be the most efficient way to do that okay so very good okay Mike let's do a warm-up poll here real quick like I just wanted to welcome everybody to the to today's webinar and I would like to know what kind of options trading you're currently doing okay what kind of options trading are you in now including maybe you're not even trading options at all you can vote more than one of these if you happen to be doing covered calls and also spread trades or if you happen to be doing long calls and puts and also cover call then go ahead let us know and and we get a good representation so far Mike I haven't seen anybody say that they're not trading options at all which that's a change from Tuesday Tuesday we had 14% of the audience that's right yeah very good thanks for their participation by the way gang I see everybody jumping in there I sure appreciate it alright we're gonna have a total I think of six polls in the and we're gonna have a few breaks for questions and we're gonna try and fit it all in an hour or in five minutes this is doesn't it well it's a possibility but we'll see how that goes very good okay alright because I like round numbers or because I like multiples of five I'm going to close it right there when I saw I saw multiples of five there and anyway that's a little bit before the full minute was elapsed but fifty five percent more than half are doing cover calls or or naked puts was which is the parody trade to that forty five percent are doing long calls and puts 55 percent doing spread trades okay combination trades and nobody today nobody said that they are not training options now not everybody in the room got a chance to vote but this sure is a different crowd than Tuesday when we had fourteen percent saying ham I'm not trading options at all so okay that tells me a little bit about what kind of pace we can do how my it does yeah we've got a sophisticated audience here sir so that looks pretty good for us and we'll be able to you'll be able to pace it accordingly good mic is there a recording of this gonna be available on the very active trading calm sunny I am recording this webinar it's you're ordering right now good so here's yeah I can pull out that probably by 5:00 p.m. this afternoon sir oh that's great okay so folks listen I'm gonna go it along at a pretty fast clip and if you want to if anything escapes your notice or anything is like hey you know can I see that again you know what yeah you can't we're gonna make this recording available for free a lot of times we charge for recorded materials but we're gonna make this one available for free it'll be available sometime tonight so so if you if there's any example that seems to go a little too quick for you let me know let's see here we've got the the backstory for me my let me give that just real fast guys like many of you I went to a seminar to learn how to trade covered calls and that was my introduction to two options trading at that same summer I also learned about calendar spreads and bear-crawl spreads both put spreads you know the credit spreads mainly along with you know cover calls trading and and calendar calls you know buying a call that's far out in time than selling near-term called against and they covered all that in one weekend and so I came out being a total genius do you buy that mic well that's what they tell you is going to happen and that's where a lot of people do get into trouble and unfortunately that's did what happened to you Kurt right yeah just by following directions I managed to clean out my entire life savings and the reason is that nobody taught me about how to manage the downside risk how to do adjustments have it how to stay out of trouble and what I did Mike instead of blaming others you know instead of blaming my guru or blaming the markets or blaming the people that were on the other side of that trade that made out like a bandit what I did do as I blame myself and I said okay Kurt if it was your behavior that got you into trouble how about reversing that behavior and see how that does for you and so Mike instead of hedging my stock by selling calls against which is what I had done I decided you know what what if I were to buy a put instead for insurance instead of agreeing to take a small amount if the if I'm right about a stock how about I insure myself coming against a big loss in case I'm wrong that's something I failed to do before and at the same time leave the upside open so that's why I did was as I began to do that also if I'm gonna buy a put option Mike when you when you go to shop for an insurance policy you know on homeowners insurance or for your car for example you probably are looking for deals right well sure I might find a deal with my car insurance for example where if I pay month by month they'll charge me $100 so over the course of the year I'll pay $1,200 but they'll say to me hey if you want to pay six months at a time we'll just charge you five fifty every six months so now my yearly fee comes out to eleven hundred and if I want to pay the whole year upfront they might give me a bigger discount and only charge me a thousand dollars so I get a bigger break that way right right so you know the reverse of that was you know what the cover cost rating that they would say hey you know if you could get fifty cents for selling a call that's a month out but you could get a dollar for selling a call that's four months out that might seem like you're getting twice the premium but really you're you're taking twice the premium but spraying it out over four months times so you're not making as much you know you're not making as much per month and I thought wait a minute let me reverse that if I'm gonna buy a put option that's a month away or buy a put option that's four ten or fifteen months away maybe it costs more but it costs less per month so that was the next idea was buy my option my put option far out in time and then as far as selling covered calls you know what I hadn't been totally broken to that yes I decided you know what I want to still sell cover calls and then what happened was I learned that not only was that idea already in practice it's called a collar trade not only was that idea already in practice but the kind of hedge fund managers and other you know Chicago floor traders you know folks that are very savvy with options they are already doing this and they're doing combinations that were much more complex than simply selling a covered call but Mike I began to learn those things and pick them up and also come up with few on my own and the one of the last things I wanted to make sure I didn't do was didn't borrow money to trade anymore you know when you use margin essentially what you're doing is you're borrowing money to trade and I said okay I'm not gonna I'm not gonna gamble money that's lent to me and end up on the hook anymore and what that turned into if you leave this fabulous contraption here Mike this is a old gosh I forget what they call this thing but it's a it's a protective device on either side of the trampoline you've got these towers going up about 20 feet and then these Gimbels and straps and everything that holds the jumper in as you see that jumper there is getting some pretty good height but he's not going to get hurt even if he turns his head towards the ground and forgets to put the rest of the way he's held in place and Mike I actually got on one of these things one time and and found that my body was capable of doing triple backflips you know this was about 20 years ago but but I could do it I could do triple backflips and and the land and then do a double front flip whereas if I was doing you know the same thing on a regular trampoline I'd probably break my neck you know if I was to do it on trampoline without the protection just a single backflip was intimidating so taking fear out of the picture kind of releases the high performer with him you know and so I began to trade this way this was back in early or I'm sorry late 2001 where I came up with these ideas and started paper trading them and I finally had put together enough capital to get into this play October 1st 2002 and I began a blog where I was showing this stuff on on online in real time you know as I would make the trade I would I would document everything and folks should look over my shoulder here's the deal my first play I got into Amazon just a hundred shares at 1609 and that's not a misprint there I got into a January 2005 $20 put option way way far out in time that looks like a lot to pay for insurance doesn't be expensive I mean you're paying at least 50% of the underlying stock price right now adding that to your position Kirk right and let me just say that you know this was my first play with real money and I wanted to be really really protective here and so yeah I did buy some of those deep in the money deep deep in the money and I didn't understand the things that I understand now about where the ideal buy point is okay but here's the deal that 890 does look expensive but in fact I'm guaranteed much of it back in fact most of it back and here's why the the of the some of the stocks price plus the put option equals $24.99 but I've got because of its a $20 put I've got a guarantee that I can get out of that stock at $20 no matter what for the next two years and a couple of months so the amount that's at risk is not this 890 it's only the $4.99 do you see that I'm guaranteed to get at least $4 about $4 of bet 890 back that's right yeah cuz you're guaranteed to get back 20 no matter what happens next so you're only risking $4.99 right now now here's how that turned out okay here at the bottom left I picked up the shares of Amazon at 1609 and over the next 13 months it about quadrupled it actually had quadrupled and then it came down to a little bit better than triple okay so that's that's pretty cool but you know another thing too is that there was still at this point there is more than a year left in the trade and in the in-between time Mike could I be writing cover calls too chopped down the price of that put could I be doing other plays now you're familiar with well yes and right now there are eleven different ways that you could have adjusted this position over time even in some of the times in the pullback you could use different techniques to further reposition your married put position at the time you know get a lower break-even but yeah there's there's plenty of ways to even generate income curt and leave the upside open we're gonna discuss one of those ways later on that's right we sure are we're gonna show how how it's possible to generate income and still leave your upside open kind of the reverse of a covered call no Mike we already did this poll here where we asked what kind of options trading strategies folks are doing now and and since that happened about fourteen or fifteen new people walked in the room so so this isn't gonna be completely accurate but let's do this okay let's let's ask the next pretty obvious question how happy are you what's your trading after after doing those types of things now I don't want you to participate in this poll unless you've been trading for at least twelve months okay but looking back over the last twelve months if you've been consistently trading the last years how happy are you or are you happy and rather than a straight up yes or no I I likely the answer somewhere along this spectrum here either you know very very happy that first one or yeah you know kind of kind of happy or you know I can make some motions I see potential but yeah something's going along here I'm not doing well or man I lost money last year and it hurt okay out Chow lost money last year or wow I'm ready to quit just to stop the hammer gene okay so so the the range here is very very good two very very bad and I'm still seeing folks coming in so thanks guys for for your high participation level today that's marvelous I'm gonna leave the pull-up for another five seconds if you haven't had your voice heard please make it known now and three two one let's close it okay Mike here are the results from today what is today October 18th October 18th sir oh geez I better know it's October 18th is my there you go okay so so here it is October 18th 2012 and we've got seven percent saying man I am absolutely kicking butt and taking names I'm very happy with my training good deal 30% next skill down saying well you know I'm ahead yeah I'm making money not enough money but I'm making money the remainder of our guests today the remainder of our class is saying one point or another not happy with their trading we got 33% with mixed emotions 15% saying ouch you know it not only did I lose money but I've lost enough for it to hurt and 15% are ready to quit that's more than twice the number of folks that are very happy with their training that concerns me Mike do you think that we can help folks here in all five categories oh absolutely Kurt I believe it's very easy to do with what we have to share with her yes well the first thing we're gonna talk about is why folks lose in the market in the first place why they lose in the first place okay now this is a true story a legendary trading coach named Ralph events took 40 PhDs okay 40 very bright people and gave them a virtual $1000 to play in a game where they were guaranteed to win 60 times out of a hundred they're dirty to win 60 times out of a hundred now Mike would you like to be given a game like that oh yeah I think that would be a good thing to do I do that very often yeah if I had a game like that to play you know where I was guaranteed to win 60 times out of a hundred and it was even money returned for example you know you bet a dollar and yeah if you're right you win it on if you bet it on you lose you lose a dollar but you're going to win more often than you lose well hey that sounds good except for this Mike the only variable in this whole equation we had very smart people okay we had a game that's 100 trys long we know that we're going to win 60 we're just not allowed to keep track of you know how many that'd be like camping cards you know they could do that but we're gonna make even money richer the only variable was free reign as to how much to bet now how well do you think these folks did well it would reflect do you think it would reflect the folks that are here on the line today I don't know but what we do know is that it looks like everyone should win with a set up how could you lose but we know that's not the case right Kurt right out of the 40 phd's 38 lost money 38 of them have less than $1,000 at the end that's 95% of the people okay so so I would actually say that according to our poll here the folks that are on the line are sharper or they're doing better they're that they're learning here okay now remember this was their very first try but still that's kind of interesting you know you got some very very bright people and they are given that winning game and only 5% of them can actually win it how about that okay well what happened the thing is that you know if if Mike if I bet a dollar of my thousand and I won Wow how big a deal is that now I've got a thousand and one dollars this is you know if I've bet five dollars and I win one now I have a thousand and four dollars okay cuz I put up a dollar and I got or what is it a house I'm sorry a thousand five dollars you're on I put up five and I won it back plus another five that doesn't really make a dent on the other hand if I was to bet you know let's bet half huh let's bet fifty percent I'm gonna put up five hundred dollars okay and if I lose now what has happened well you're down 50% right I've got to double my money just to get back to where I started okay so so here's the thing what folks failed to do was know how much to bet that's all that's all they just failed to know how much to bet in a game with a hundred 60% of which they're guaranteed to win you know if if all these guys did was bet a hundred bucks a play they would have 160 times and made it six thousand dollars they would have lost 40 times and lost four thousand dollars they would have taken a thousand dollars and turned it into three thousand dollars they would have from their thousand bucks they would have earned two thousand and still have their thousand to start with so two hundred percent return Wow but most folks did not do that here's why the martingale principle okay shows us that when you begin to lose you have a an exponential amount gain in what you've got to get back for example like if if I lose ten percent and then I win ten percent does that mean that I'm even well unfortunately it doesn't Kurt if you started off with a hundred thousand dollars we invested that money and you lost ten percent well you'd be down to ninety thousand dollars now you take your ninety thousand dollars you reinvest it you make ten percent well now you're only at ninety nine thousand you're still short a thousand dollars from your original starting point right I lose ten percent mate ten percent and now I'm behind by a grand not cool and it gets worse and worse in fact Mike if if I lost fifty percent would I need to make fifty percent to get back to either no you've got a double what we have left Kurt you need to make a hundred percent of what you have left just to get back to square one Wow so the martingale principle or it's also nicknamed gamblers ruin it was like this okay all those red lines represent a loss all the blue ones represent how much you need to make in order to get back to where you started and as you see we've got a just kind of a linear progression numbers here but an exponential progression of what you've got to earn to get back but you know what way over here to the left this is this is the first most important principle and we I know everybody didn't come for a math lesson you came for a trading lesson but listen you can't get away from mathematical truth okay there's there's there's only a certain number of elements in the periodic table there's only a certain number of colors in the spectrum and there's only a certain way in which you can have games that outstrip your losses and that's to pay attention to the martingale concept Mike if I lose 50% that means I need to make a hundred percent on the next trade get back to where I started that's that's hard to wrap your head around doesn't happen that often right yeah the hundred percent game doesn't happen that often the 50 percent loss does happen when for some oh yeah I've seen that if you tell you seen that in your career until we started to get a get a hold of it like hey guys you know what I'm gonna brag on you for a second there Mike I'd like to use your trades as examples just you know just to pick on you but but back oh I think a couple of years ago you're in talisman energy talisman energy went down by 50% or more you're writing the time that you were holding it right that's correct sir right but your loss was only four and a half percent yes because I had protected its using the radioactive trading technique so I was long stocked the entire time it did take a four and a half loss that's right but the stock was down over 50% right okay so you know if you had been in that stock you know just plain vanilla buying the stock right you would need a hundred percent game to get back to where you started yes Mike there's a 5% loss mean that you need to win ten percent on the next play no math doesn't work that way either we can't simply divide by ten what it works out to be Curtis if we suffer a 5% loss we only need about a 5.3 actually comes out to be a five point two six percent gain just to get back to break-even very good and you could wrap your head around that right I mean that's that's a lot easier to see yeah I mean I've seen those positions over the past couple days one of the collars I'm in unfortunately I guessed wrong I should have traded as a married but not a collar I've seen that and then today one of the other positions we saw eBay jump up about 5% this morning after earnings so that's that's pasta you know so you're saying that you you've had that 5% or better game in one of your plays and and you wish you'd been doing it radioactively because it'd be a more than piper singing actually it's up 17% but I trade it as a caller instead of a married put so I'm gonna make 3 percent instead of trading that's right I know you do do about half of your account that way though so that's right okay well here's the deal we just don't know what's going to happen next so there will be strings of losses and wins it's inevitable okay but if you're going to have the capital to take advantage of those swings up you've got to use a structure that's going to keep your losses down and let your winners run for example Mike I just use these if I just use the example where you have lost four and a half percent in your talisman energy play yes talisman energy goes down 50% you lose one and a half percent no great shakes but later that same year or was it earlier it was actually earlier in the year okay earlier that same year you had a fifty nine point eight percent gain on your married put it was both stock and put is it uh and we're calculating the gain based on everything that you put into it based on what you paid for the put and what you paid for the stock it officially nine point eight percent gain now listen everybody if my kid had a I'll just round off the 59 a point eight to sixty okay okay if my kid is sixty percent gain early in the year and a 50% loss on the same size capital later dear is he a head it sounds like you're ahead by ten percent but are you know I'm actually behind by around 22 percent Alex yeah because if you make sixty percent but then you lose half of it there's enough of your capital not half of your 60 percent game but half of your capital that's left over man you're behind where you started but you weren't behind where you started and the reason is that you allowed your up side to run right and that's right about you you limited your downside there very very well now Mike we ask this poll already are you happy with your 12-month performance Mike are you are you happy with your 12-month performance yeah I'm happy with my 48 month performance Kurt I started trading radioactively about four years ago and we first got partnered up and I've stuck with it over those last four years because it has been meeting my goals more than any other strategy as you know I've been trading for 10 years here at power options but compared to those other strategies covered calls naked puts calendar spreads vertical spreads straddles even iron condors and so forth I've had more long-term success and better success with the radioactive trading techniques than those other strategies yes I'll say that Mike is the options education director over a pair of cents okay power options I I don't own power options I don't even own a piece of power options it's it's just a company that I'm committed to helping you know in terms of education and and they're committed to helping not just me but thousands of subscribers with their with finding and screening ticks okay but mike is almost I would say you're almost morally obligated to do as many of those trades as possible because you're in a position where you're you're teaching people about the power options platform and how it can be used first straddles first strangles for all these different types of trades you've done a lot of them I know there are some things that you won't do like you won't do a short straddle right I know do the short straddles and strangles they won't do iron butterfly's honestly anytime I get a customer who calls up and says well I'm doing the all call butterflies or the iron butterflies I can show them how to use the tools but at the same time I'm honest with them as you mentioned and I say well these I don't trade because to be honest if you can pick where stocks gonna be trading exactly over than a five cent or ten cent range within the next thirty days you probably don't need my help yeah well Mike in twice a week for the last five years and four years since you've been joining me mhm I've been I've been posing this question you know saying hey what's the single most desirable solution if I was a genie and I could only grant you one wish on this deal here what would you test okay and and almost always it's it's controlling losses but let me just ask the today's crowd okay would you like for me to give you a magic wand that would help you be 90% accurate at picking stocks or 90% accurate in timing trades or would you like to make a little bit more money than you have been when you're right or would you like to not get hurt badly when you're wrong because remember is when you're wrong 10% of the time you can still lose what you made the other 90 but or would you actually honestly say you know what there is no problems at all of my trading I can't make any improvements anywhere so keep it to yourself okay so let's leave that up there for another 10 seconds and and Mike then we're going to go ahead and show the solution and not only are we going to show the solution we're going to show how it can be applied now to these risk free spread trades all right so that's a full minute let me go ahead and close her off whoops somebody jumped in there at the last second because of rounding this looks like 101 percent because okay but what's the clear winner here what if what does half of our audience want to make sure they come away with exactly what you projected Kurt that we just don't want to get hurt badly when we're wrong right and then the second place winner is a I want to be able to pick stocks well I've shown in another webinar we're not going to go through this exercise today but I've shown in another webinar where if you were right once and you were wrong once at picking stocks if you just played the stock you would lose but if you played the married put the way that I show it you would win and it's the same stock right it's the same fact so so picking stocks is not necessarily the solution but structuring the trade is so pretty cool all right so the reason again that you're going to have the capital catch those runaway winners is that you haven't lost much on your losers okay just like Mike making 60% one trade and losing four and a half and another trade even though he should have lost half of this capital here's the deal I call this force ideal size trades and what that means is I'm gonna risk an ideal size of the trade here we have Sumana shares okay and this was in March of 2011 picked up at the same time August 2011 sushi fried output option for 580 so that makes a total invested amount of 69 70 but we've got a guaranteed exit of $65 now when are you really clear Mike if the stock wants to go to the moon do am i obligated to deliver it at $65 no no you have the control that if it drops to $1 or $2 per share you've the guaranteed right that you can choose to close it at 65 and you'll get $65 back for the position only risking 4 dollars and 70 cents or 6.7% if the stock goes up to a hundred you have no obligation to do anything you can choose to liquidate the position you could choose to make an adjustment by buying the put you have control you have the rights you're not obligated to do anything yeah for example that side goes to $80 first of all that $65 put option is still gonna be worth something because you know there's time left expiration but I can get out for 80 bucks I don't have to get out for 65 this is kind of the polar opposite of a cover call trade now right Michael I wouldn't I want to point out two things number one this for dollars and 70 cents when we set it against the 69 70 that's in the trade that represents only about six point seven percent of the trade is at risk okay no this is scalable to pay on how big of a fish you are you could get into more shares and contracts and still be risking only 6.7% now Mike I did this trade in an account with over a hundred thousand dollars in assets so with over a hundred thousand dollars in assets if I'm risking a dollar amount by getting into 200 shares and two puts if my dollar amount at risk is 940 yeah that's six point seven of the trade but it's how much of my account well in near hundred thousand dollar count this represented less than one percent it was 0.9 four percent of your total portfolio value and you're investing of course this 940 at risk is against the capital invested about thirteen thousand nine hundred and forty that still that monetary risk that 940 at risk the worst case scenario in that position is a less than 1% of your total portfolio right now here I'm showing 50 percent of the audience that participated I'm showing 50 percent saying I just want to not get hurt too badly when I'm on let's look at the practical of that let's just look at the practical side if you limited risk over the last 12 months if you limited risks or less 12 months like what I just showed about 6 percent of the trade and 1 percent of your portfolio if you to practice that kind of money management last year would you be better off ok so uh one thing you could say is you know what I did that I did that I kept my losses down to one percent or less but I still lost last year or you might say I might still lost but you know what I would lost much less or perhaps you lost over a while last year but taken in consideration you know the the change you know I would have won or maybe you didn't win last year but you would have done better with what I'm saying or maybe maybe he might been one of those guys that said I'm very happy with my trading results in and then today is polls today's poll it came back seven percent said that 7 percent said I was very happy as my trade results right now I'll tell you I'll tell everybody I'll just let the count it's more than 7 percent ok let me go ahead and close that poll and I'll share the results Oh a 38% what I said I'm very happy with my trading results 13% said you know what I lost overall last year but what a one if I'd had done that and 50% said you know what is I might feel the loss but if I did I would have lost much less now first of all Mike everybody that answered this poll are they better off yes College should have shown so far everybody right everybody's buddy an answer yeah yeah nobody in the audience volunteered saying you know what I did that and I still lost money last year hmm how about that now folks we've got 67 people on the line out of 67 people plus Mike and me on the line if we look back over the last 12 months nobody has said you know what I practice that kind of money management and I still ended up behind nobody said that that tells me something tells me that we get a winner on our hands okay if we if we begin to practice money management like that last 12 months no loss over six percent of the trade or one percent of the portfolio everybody that answered that poll would have been better off doing that okay and it's like this you cut your losses short let your winners run now Mike there's a strategy of selling cover calls or something they could put to go well with that idea catch a little short let you lose money doesn't know well with that idea at all does it curve it's kind of the opposite what about spreads the the the traditional way butterflies and condors vertical spreads is that what well you do know upfront when you get into a spread position what's your maximum risk is so in a sense you could defend it and say you're cutting your losers short if it goes against you we are not letting your winners run either and in fact most of those vertical spreads as we know Kurt when they're set up looking for the higher probability of 75 or 80 percent probability of success you're looking at a wrist award ratio of 10 to 1 or 9 to 1 and that's really difficult to maintain that's right well my soccer baddest man is if you take 50 cents wouldn't you're right but you lose four dollars and 50 cents when you're wrong that's a bad seat when you're wrong yeah it wipes out all of your previous games so I got this crazy idea that seems a downside to start and then leaving the upside open was a way to go but that's not where it ends okay it's only where it begins so how far I have not been proved wrong on this manage your money thing I have not been proven wrong on this managing your risk thing okay but here's the deal we get these riskless spread trades okay and we're going to use them to take back the edge all right adjustments done by way of message spread trades I call them income methods because out of the eleven methods only one of them is done into debit it's done into debit but guarantees a higher return okay but the other ten are done in a credit the other ten put money in your pocket that's spendable now and we're gonna show one of them right now okay so we've got Hume on it let's go back to that same trade where we're buying the stock and also buying a put option to keep ourselves out of trouble we've got a total amount at risk of 470 or 6.7% of our underlying investment we've already done our scalable scaling so no matter how big a fish you are no matter how many shares you pick up if you get a hundred shares you pick up one contract if you pick up 200 shares two contracts a thousand shares ten contracts you still only have six point seven percent of your capital in that trade at risk man it sounds like a wolf howling out here do you hear me do you got it I can hear something out there yeah well I'm glad I'm safe inside the cabin here all right so now we've got the married put set up we're looking at that and now we're risking 940 in that play now let's look at a bear call spread on Humana where we would sell to open to sixty seven and a half called and buy to April $70 calls and this is generated credit of 50 cents over times two contracts that would be a hundred bucks right that's right yeah we have 50 Cent's net credit with two contracts would receive $100 into our account for this particular trade Kurt that's right what about the dark side yeah we we get paid $100 right here says the total cost is a negative hundred dollars which means we get paid $100 to get into this position and then what's the dark side of this whole transaction well as you mentioned Kurt the dark side now is if the stock goes up this is a bear call spread you want the stock to stay the same or move down in price below our short option if it goes above 70 we're gonna have to pay 250 to close this spread but times two contracts that would be $500 well we keep our 100 so we're risking $400 here to make 100 ouch okay so if we're right well if we're right four times and wrong once we break either yes right if we're right five times in wrong ones then we'd be ahead by a hundred bucks so I guess what we need to do is is be right on this a lot more often than we're wrong so that we stay ahead that's right yeah but here's here's something that I want to point out all this red is represented by the fact that we don't have stock on hand to deliver what if we did if we did have stock at a lower cost basis than the 6750 uh-huh would any of this exist what any of that red exists no because our know wouldn't Kurt because our obligation would be covered by the long stock position oh okay all right so let's let's explore that a little further okay we had in our radioactive profit machine which is you know a married put put together the way the blueprint shows okay the blueprints my book okay the blueprint shows how to put together this married put that I call a radioactive profit machine and it's got nine hundred and forty dollars at risk and the put is protecting all the way till August its March now okay well it's not March now but the example is March okay and the inca method number six or bear call spread times two contracts has four hundred dollars at risk now that collapses at April and April this is going to be over and done with whether it whether it ends up costing me money or whether it ends up you know ahead of the game and lending me money but no matter what it's gonna be done in April so I could do it again okay all right so what do you figure the total risk picture is with a nine forty at risk in the Mary put and the four hundred risk in the bear call spread hello if we just add everything together we'd be looking at a risk of thirteen forty yeah that's that's what most folks look at here they say well you know you've gotten this much written you got that much risk so it must equal a total of the two no that's not how it goes we're picking up a hundred dollars here and that pulls away from the cost basis on the stock here that makes our Mary put eight forty at risk instead of nine forty at risk no by the way because we own that nullifies completely the risk that's in the bear call spread there is zero risk to doing a bear call spread in this context would you do it in this structure that's exciting okay it's really exciting the bear call spread if it ends up that the stock goes up to seventy okay yes that's what it would take for that bear call spread to cost me the national four hundred dollars well if it does that dude I own the start you know the stock that I've got in pocket is gonna more than cancel that losses here's how the the I needed power option software to actually illustrate this to people I mean I knew it before I was practicing this for years before I found the power options platform yeah and the custom spread trade tool but if you look here now it's got all four legs represented we've got the stock ownership we've got the put option protecting it and we've got the bear call spread call spread causes this little bump Mike here's the worst possible case of that bear call spread the bear calls the the where we sold the step 6750 about the 70s right the worst case scenario is if it goes to 70 bucks well gee isn't that means we've lost four hundred dollars right correct Yeah right but in the case of already owns the stock it means we have to deliver the stock at this price and as the underlying keeps going up we're losing money on the put at first but then we've got these $70 calls that we've been well we've been paid to own right and and as the underlying continues up we still have an infinite upside potential the bear call spread if it closes against me well the rise in the stock more than covers my loss I can't lose without winning yes that's really exciting that's really okay again we've got a 6.1 percent risk now instead of six point seven we still have the unlimited upside we have 840 risk now instead of nine forty and again unlimited upside so the bear call spread done correctly you know done according to the dictates that they're set forth on the blueprint it introduces no risk even though it takes you credit it's nested within the married put Mike could that's not keep going up and it would be all right well yes because you haven't capped your upside with this particular play even if you do get assigned early on the short call well you still have that long call in place that's generating profits for and remember technically you receive that long call at a credit right right now Mike I'm gonna send a link to the audience okay with the chat bar I'm gonna send a link to power options it's wwr a calm and /r 84 two free weeks of power ups and on me and now I would love for you to go and check this out I'd love for you to just give power options of spin and check out the kind of play that just showed you and and try it out a couple of different stocks okay all right so Mike this is the deal okay in this particular play here we've taken the bear call spread and we've taken all the risk out of it now I'm just gonna ask everybody what do you think of that what do you I mean what do you think of that what do you think of spread trades that take income risk nothing if they go against right and still leave the upside opened in your particular stock that you might be poor does this hedge beat covered coals might cover crop that would cover calls give you the the measure of protection that this play would Mike absolutely not we had one of our attendees just post in a little bit to check out Google I mean that dropped about declining between seven and ten percent right now due to a leak of the earnings I guess but if we were in a covered call okay we may have generated our two two and a half three percent premium for the stocks down ten percent we're still losing seven percent right under the married put the most we could lose of course is five six or seven percent depending on how he set up and that's in the absolute worst case scenario if the stock continues to fall the covered call trader is going to continue to lose more and we're going to be at a point where we can decide okay we can close this position now or maybe we can readjust it but we're still only risking single digits right you know I'd like to point something else out to folks we're showing getting into all four legs simultaneously that's what I did with Humana was getting into all four legs simultaneously you know by of estas by the foot so sure to call by a long call all four legs but it's possible if you already own a stock and I want everybody that's owning a stock right now to perk up and listen it's possible if you own a stock for you to reach Payne the unlimited upside potential of ownership of that stock but at the same time Lyon insurance policy and pay for it with your income method I've actually taken I had a fellow that had McDonald's chairs that were you know like 40 bucks about where he got it from lightful I showed him how to get paid to have an insurance policy it's called bulletproofing what he did was lock in the games that he had already paid and yet still be able to hold on for a further upside so if the stock goes down hey you know it protects him a heck of a lot better than a stop order would and he's able to do the same to method six play again and again and again so let me go ahead and share this 33% said Bates this shitake mushrooms that I covered calls 25% want to say hey can I knew that my RA than 58% say whoa I didn't know you could do that you got any more yeah we do yeah we do I've got well we got 11 total so Mike I did say that weeds pause for questions so let's pause and take a couple of questions now okay and I'll show a second gosh maybe a second amateur this was spreads right okay well Ziya says i don't understand how the 6.1% is calculated compared to the 840 risk okay well I there are 200 shares of stock purchased for Hume on there were two put options okay there was the bear call spread open as well the total resident flied yeah go ahead okay the the worst-case scenario if the stock dropped to zero dollars per share you see here the risk is at eight forty the total investment of the two hundred shares plus the two puts minus the spread premium is thirteen thousand eight hundred and thirty-two so I take 840 if the stock drops to zero dollars per share we'd lose 840 but 840 ÷ 13 thousand eight hundred and thirty-two comes out to be six point zero seven or let's round it to six point one percent that's the maximum risk and again that maximum risk Kurt is defined as if the stock dropped all the way down to something along lines of $10 per share $5 per share $1 per share that's the risk the worst we can lose is $140 on an investment of thirteen thousand eight hundred thirty-two that's them here okay now real quick got another question here oh I had this question last week or last last what I'm sorry I gotta answer that there's a couple questions that came in Levi wanted to know can deepen the money leaps be used and substituted for stock leave I know we don't advise it and there's a reason why these in the money long strangles that we get asked about often enough I have a couple white papers and probably gonna do another one that comes up so frequently you're asking the right questions don't get me wrong but the problem is with that scenario your percentage of risk is too high against your investment because it's a leveraged position but the other problem Levi is that what ends up happening is that in normal market conditions that in the money long strangle because you're Delta opposed you know as the stock moves up one point you gain 60 cents or 70 cents or 80 cents on the call but you lose 70 or 80 cents on the put your Delta opposed you're not making any profit so in normal market conditions where the married foot is showing a profit just by liquidating you're still at a loss on that in the money long strand what I'm going to do Levi's I'm going to send you those two white papers cool oh okay David I would love to do this but this is a different topic this is something that you know usually I put together with these white papers we'd love to do it we don't have the slides prepared we've only got seven minutes David asked great question the right question I believe David as a blueprint owner of always asking is can you show the difference between the trade show meaning Humana and what the gain would have been at various price points without the spread when the gain have been larger 72 or 75 without the spread well sure it probably would have especially as you go higher because if you don't do an income it and this is something I have kurt you've heard me in conversations before this is hard to impress upon some investors when they're looking at the radioactive train things they want to jump right in and sell the call right away or do this income method number six right can I do it from the beginning yeah but if your expectation was that the stock was going to move up five to eight percent to begin with you're gonna be better off allowing that move to happen and then doing an income ended but is there a trade-off with each in commended absolutely there's a slight trade-off with each one and that's what Kirk discusses with what's called the seagull model for every income method in the blueprint so that you can decide how to do with that one last question Kurt just want to cover real quick and David all address years later your question later on by email after the presentation sometime this afternoon you want to get a moment oh you teach wants to know once I purchase this is more of a purchase question but I'll get it out of the way now care case we have more questions later on once he purchases the blueprint is he able to download the PDF rather than wait for the mail unfortunately no right now we're only offering the blueprint as a written document the full text segment is not avail as once it's pretty right I'd like to address the who was it that asked about being commended six would you have done better without doing any capacitive psychos oh I was David that was David okay David you're gonna really like the next thinking method that I show or one of the next two because I'm gonna show too you're gonna like it a lot because it actually collects more money because the stock goes up and you're long the stock you're long the stock do the thing to method it helps you to do what I call double dip you actually get paid twice on this particular a commitment and I think it's why a lot of folks that open up the email and decided to come today I think this is what the game for so shall we proceed go ahead go ahead alright cool well so here we are we already used the example of how to set up a Mary put and so forth what I'd like to do is I like to show bulletproofing a stock and then after bulletproofing we're going to show how to do a spread trade that may pay you twice okay oh by the way I'd like to call the I'd like to say that increment number six is give me my money now and it takes away the market makers edge because the bid aspera that he sticks you with will shoot we're taking a fifty cent credit per spread on that one right and as we do we can't get hurt if the spread goes against us we still profit okay and and you can use this repetitively to take out all risk in fact let's see what would have happened if that stock went up and normally Mike if you did this play if you sold a lower strike price put and simultaneously bought a higher strike price put what would you call that well that would be if I had the same expiration card I'd call that a bear put Devitt spread right it's a mere put spread you paid to do it okay and there is risk with it okay but take a look some folks object to spending money on the put but what if you could use your put as a dynamic hedge there's no risk to that bear put spread when it's in the context of the married put okay so let's say that we had bought the August $70 put option for 690 and simultaneously sell the August 65 foot for 410 well that makes a debit of two dollars and 80 cents but if we're doing this in the context of the stock that we own if we do this in the context of the stock that we own already and and having already bought the $65 foot well what we're doing is raising the strike price by five dollars and paying 280 to do it here's the custom spread tool and power options I'm gonna go back to the human example the last two lines here show the original pricing I got into human at 63 ninety and bought two contracts of the $65 foot for 580 right now up here you'll see the $65 put again I'm selling it why am i selling it for less than when I got it for earlier well the stock must have moved up in price you can see right above that it shows the price there of 70 dollars and 72 cents your stock move it up so the foots going to come down right and so what i'm doing here is selling that foot and simultaneously buying a put this higher up look what just happen there had been 9:40 at risk now there's 500 at risk there had been six point seven at risk now there's three point four at risk that's the we call it encompasses number four and if you do that enough times it bulletproof take a look we've got six point seven percent at risk here yes good adjustment and now we've got three point four percent at risk kind of cool now if we add our bear call spread back in okay because you could have done this well lookey haha we're taking a risk down to four ten or two point eight percent we still have the unlimited upside potential all right and it just shows that you're not limited to doing only one Inca method there's a number of different things that you can do here to continue reducing risk in it's possible to reduce the risk so that there's no risk at all you do this bear call spread a second time for example in april and guess what you could bulletproof yourself what happened in fact was my stock did go up and so I ended up taking a taking the profit it went up above seventy dollars so the inca methods reduced the gap between the so called breakeven line and the strike price that protects so that there's less and less at risk and if yes you reduce that gap to less than zero that's not always possible but it's very often possible Mike during the flash crash of May 6 2010 you had bulletproof positions didn't you yeah I'm son with a low risk of less than 1% or right around 1% as well yeah you had like a 1% risk a 2% risk in some of your plays and you had less than 0% risk in some of the other plays and so when the flash crash happened you're like now okay yon let me have another bagel you know no big deal and that was the other advantage is that it wasn't a stop order or a trailing stop where I moved up in the flash crash happened I was instantaneously out of the stock at that time for only that you know 1% gain or whatever it was I had a choice to sit there and say well if this comes out to be real if this is real if this is an ax event I know exactly understand but if it's something that's as it was and the market comes back up a little bit later things correct themselves a little bit later I didn't get stopped out and then have to you know go back in at a price that was higher than what I'd originally paid or anything in that nature right Mike I'm gonna skip questions right now because we're right at the hour yay I was gonna show this this spread trade they can pay it twice okay there are a couple of instances in our past one of my players when you're play is one of my clients plays where we were able to lock in again but also leave the upside open lock in again and leave the upside open I get that so anyway let's go ahead and check out this final one double dipping okay all right so here's another one once you both through the stock there's many ways you could end it okay you could hold it nobody says you have to do anything I mean when when you've got a boat through stock when your strike price for your stock is higher than the combined cost basis for your stocking foot man you're sitting you're sitting pretty okay but you could play it with further income methods okay somebody just poked in and said there's no sound I'm not having any issues Kurt I'm not having any issues I wonder if as I there's just I am a small broadband okay yeah yeah so yeah okay all right so that might be that individuals computer so well let's go ahead and play it further with the other income methods we're gonna do another risk free net Nessun spread trade right after a bulletproofing though okay so here's the fact I had 200 shares of Lulu and two June $80 puts at a total cost basis of 85 19 now if we look at that that that's five nineteen times 200 is a thousand and thirty eight dollars that I had at risk but I decided I didn't want to have any risk and after the stock moved up a little bit what I did was the bear but spread that I just talked about where you buy to open societies and sell to close the 80s some folks would argue and say that's not a bear put spread because you already own the 80s well okay that's fine but in my spread platform you can enter it as a spread yeah yeah it treats it as a spread okay so here's the deal it cost me $5 to make this adjustment but it raised my payout by $10 and so we took the the original married put play that had 6% at risk and made it you know here it is six point one percent risk a thousand $38 and we raised the payout by ten bucks and paid five to do it times 200 shares we end up with thirty-eight dollars at risk out of eighteen thousand and thirty eight dollars or less than one percent okay so you don't even see where it could lose down here right is this more or less bulletproof Mike yeah I mean this is the worst case scenario hold it all the way to June expiration we can assume that the even if the stock went up another ten points or twelve points your put would still be worth fifty cents or something along those lines so we're pretty much there yeah it's pretty much both now here's the riskless nested spread that I call the money okay a secret you do it in the first place and there's three different ways we're not going to explore all three that's why I wrote a book guys okay but there's three different ways that it can bring in more later and they incur no risk to capital by the way try that power options to check this in Kumasi number five is where you buy one call and sell two it's a ratio call spread and here's what I'm doing the April mighty calls were selling it to 90 the April $85 calls were available for 560 on the ask so here's what happened I sold two two what are they $90 calls at 290 piece that generates 580 got it so far so far sir yep using that premium I bought an $85 call now I've taken a net credit of 20 cents now Mike what's normally the problem with a racial call spread incident risk to the upside sir the infinite risk of the upside because I've got a naked Cole I've got one long calling too short okay one long call but two short ends that's what makes for this infinite unlimited upside risk if the stock goes high enough I could be bankrupt all right and that's not a happy thing but what could we do to take away this risk well we have to have something to cover that extra short call don't we yeah if you owned a hundred shares of stock that would go away there would be no risk if I owned 200 shares of stock not only does it go away but I've also still got my unlimited upside so that's kind of cool the spread itself pays 20 cents for me to get into or $20 on the front end is Mike if the stock closes at $90 now the $90 calls expire worthless but what about that $85 call well it's gonna have some intrinsic value isn't it Kurt no it's gonna be worth something as the stock goes sideways if it goes sideways I did this when the stock was at 88 dollars and 15 cents if it goes sideways there's nine days will expire and the 85 will be worth three dollars and fifteen and I got paid to own it I have paid 20 cents to own it so it would be a better return right then than a covered call right it could end up being even more anywhere in this zone from 85 dollars and 20 cents to 94 dollars and 80 cents anywhere between there I just say the second time that's exciting okay so the maximum profit is we could pick up 500 20 extra dollars okay all right now so here's an interesting situation there Mike because I did this in the context of owning 200 shares of stock it's like I bought a bull call spread right with the one long call and one of the short 90 calls right and I used the other $90 call to finance it does that make sense yeah we could break this down into a view of a covered call or a caller spread with one bull call spread that was received as small credit what if I buy to close this covered call only yeah well then you solve the married put in place and a bull call spread yes I'd have the Mary put plus a bull call spread in place well Mike that's what I did you know why because the stock went to 93 dollars a share okay they didn't want to have it called away I bought to close one $90 call for 350 now that doesn't look very good because I'm spending 350 to stay in the stock mm-hmm but then again the fact did go up five five dollars remember it was 88 15 right when I did this play and now it's at ninety three dollars and change well earlier before expiration happened earlier in the day on expiration Friday I bought the $90 call for 350 I had been paid 20 cents to get into this racial call spread in the first place right that's right you kept that 20 cent credit from the original spread placement okay so it's like I've spent 330 to stay in the stock that's gone up by five dollars mm-hmm okay but let's not forget I still have the 85 / $90 bull call spread in place that's now both legs are in the money yes so not only do I get the five dollars of capital appreciation in the stock I also get five dollars from this bull call spread that's going to close and the money I mean Lulu's over ninety three dollars a share am I going to realize this game more than likely yes yeah well I did the stock closed on expiration Friday well above 93 dollars a share and so in the mill the night my broker buys the Loulou at $85 and delivers it at 90 putting another five bucks in my account so I've spent a total of 330 of my management I've made five dollars on this bull call spread that's a buck seventy that I get to keep plus the five dollars appreciation in the stock it's like I got paid to get out of this trade kind of cool all right now if if that had been just a plain old shower stall then a covered call right I would have had to paint a stand so Lulu shares were trading an 88 and changed when I showed the fish and subscribers incompetant number five took in 20 cents credit that's when Lulu goes up i buy to close the calls but I also get paid on the bear call spread okay just one more reminder of what's happened so I've gotten paid a buck 70 Mike if I had done a covered call play I would have gotten what 90 to 90 up front for the selling the 90 call yeah and then I'd have to pay 350 later so it's like that I'd have to pay out 60 cents to stay in and realize that capital game but instead I got paid about 70 to realize that capital gain that's the magic of the money net so Mike I'm gonna do a final Poland and then we'll just ender okay let's see here if every spread trade that you did was heads I win tails and when more would you like that would that go along with your investing philosophy and then we're gonna show a graph of what it looks like in power options okay honestly Mike we do have a couple folks being wise guys you know and saying yeah like risk to be higher than reward but for the most part folks are pretty pleased with this idea of getting paid and then getting paid again perhaps so whoops okay at one point it was 90 3/7 right now it's 85/15 but you know again it's these are wise guys of course we want to have spread trades that that pay off so well okay all right so here's what the graph actually looked like okay after bulletproofing Lulu we're thinking method for this Zone in here they see the accelerators wave yeah between 85 and 90 it's truncated a little bit but that's between 85 and 90 yes because we had 200 shares long to call short and one call long we ended up still having an unlimited upside potential and no downside at all because of the productions that had essentially been paid for okay so this period of sharp upturn shows the stock growing even more during the period during which we had done the income at number five play tiny cool okay all right so I want to show how to get the blueprints and we're gonna go ahead and close we have answered a few questions if there's any super relevant questions that we can answer in just a second or two we'll do that but for the most part if you'll if you'll submit your questions by email we'd be really happy to get that okay really of course yeah I wanted to give the special offer its $3500 for the seminar and $6,000 for the seminar upgrade I'm just kidding I'm just kidding the the blueprint is actually 350 bucks okay we've got the home study kit which includes the blueprint for easy reference but also the CDs which explain all the ink invented in a multimedia format like what we're doing here you know it's sound plus video and and and of course you can go back to the blueprint and and reread so if you learn better by way of this multimedia format I would say that the home study kit is the best way to go and if you're more of a technical person that gets everything they need to out of reading material then I would say the blueprint has a better value for you mm-hm but we have a special offer the special offer or hang on let me run one poll here real quick and the reason I'm doing that is just oh just to give us a moment so I can switch over to a different slide here the iridium special offer there we go okay all right we're gonna show something in a minute here but Arjuna did ask a question Kurt was getting getting to this a little bit behind 10 minutes over we're getting to it our Jean wanted to know do you have a paid subscriber service we give these type of trades yes blueprint owners or anyone can but blueprint owners if you pick up the blueprint you'll get a special offer where you can subscribe to the fusion service at radioactive trading com what you get with the fusion services you get a listing of several lessons the kur is created to help you absorb and master the tiered materials I really should say but you can also look at the fusion trades and the past ones and the current ones well and Ernie's and renters trades the president found their power options he also shows his trades in the Ernie and powerup portfolio so you can look at those trades now if you're a self-directed investor that's what Kurt shared with you earlier that link to power up calm slash r84 that 14-day free trial that's designed for those of you that you know rather than looking at the trades that Kurt or Ernie has done where you can search for the radioactive positions that match your specific criteria and then for the research analyze those positions and track and manage those positions so it's designed more power options is more self directed but the fusion service does allow you to follow those trades plus a lot of other tools to help you with your married foot training as well very good mic I sent to everybody I sent that link for two-week trial of our options and I didn't like for everybody to take advantage of that whether you do radioactive training or not whether you do you know it supports 23 different strategies and it's the best search platform that's available not just search but evaluation platform it's it's the coolest but for folks event that pick up the blueprint today all of the home study kids all right in addition to the two free weeks they will give you a free month as well okay so so two free weeks are available for nothing if you want to click on that on that link that I sent you and you can get another free month on top of that by picking up the blueprints and/or the home study kit okay here's something else that it comes with the blueprint and the home say kit the QuickStart guide it's normally $50 this guide will guide you from doing a plain vanilla stock ownership or spread trades or cover call trades into how to very quickly wrap your head around and begin protecting your stock to the single-digit level and for some of you that already own stock that's up from worry about it you might be able to be bulletproof immediately so that's that's exciting so there's the QuickStart guide the foundation is a radioactive trading CD normally sells for $89 we're including it free with the blueprint purchase in the home study kit the foundation of radioactive Trading CD comes with it so instead of the free CD we'll give you a free consultation ok so if you're picking up the home study kit and you want to help you you want some help in mapping out your trading to meet your goals listen I'm not a a make you broker I'm not a financial adviser but I can certainly tell you how I would trade your account you know according to what goals achieve yeah okay and I can help you come up with a trading plan that fits your personality and capsule level and needs okay so that's that's what's available here today if you've got a postcard that says iridium on it this is what this was all about and if you didn't get a postcard but you're here today on this webinar whether you got the postcard or whether you didn't yeah you are cleared if you go and place your order at radioactive trading com I don't think there's a place for you to enter the word iridium yet I don't think that's happened yet but I will say that if you're hearing my voice you have got that even though it's not advertised even though when you go to read AFRICOM it doesn't talk about those bonuses okay everyone that's on this webinar is going to get it okay and if you're listening to recording of this webinar well I would recommend sending your name and address to us so that we can include you with that send it to supported radio active trading com yeah well make sure that you're part of that Iridium offer okay Mike that's pretty much it did let's go ahead and close her up okay and I am very happy to have seen you today again and folks we'll be back on Tuesday probably doing a different pair of trades and recommend that you go to the blog and check that out too okay Mike anything to add subtract right now I think we're goods and we'll get ready for expiration tomorrow and we'll see you all next week hey Dave all right very good see out there everyone happy trading bye for now

Channel: PowerOptions

Views: 8,513

Rating: 4.2941175 out of 5

Keywords: Stock Insurance, limited losses, spread trades, nested spread trades, protect covered calls

Id: BOiZApGo71U

Length: 79min 23sec (4763 seconds)

Published: Thu Oct 18 2012