Married Puts

Question 1

What put is generally bought for a radioactive trade?

Answer 1

A put that gives a 5-8% risk with at least 5 months of time left.

Question 2

How deep should a put be bought for a radioactive trade?

Answer 2

Less than 20% in the money.

Question 3

What does the 5 line setup look like?

Answer 3

1. Buy stock (Stock Price)
2. Buy Put (Put Price)
3. The addition of these two is the total invested. (Stock price plus put price)
4. Put strike price (Strike price)
5. Amount “at risk” is (total invested - strike price)/strike price

Question 4

What is the gambler’s ruin table?

Answer 4

It lists the amount by percentage that must be recovered for a corresponding percentage loss.  Examples:
10% --11.11%
20% -- 25%
33% -- 50%
50% -- 100%
66% -- 200%
90%-- 900%

Question 5

What is the at the money bell curve?

Answer 5

It is a bell curve that illustrates that options “at the money” have the largest percentage of time value. Options far out of the money or deep in the money have a much greater intrinsic value and very little time value.

Question 6

What is the time decay curve?

Answer 6

It is a exponentially decaying curve illustrating that option values drop increasingly rapid as the option approaches expiration. Usually the last month to weeks before expiration.

Question 7

What is FIST?

Answer 7

Force ideal sized trade. The married put together with the stock limits your position size. Position size is a problem for some option traders because they will blow up their account with a single trade.

Question 8

What is CEGA?

Answer 8

Condition, Expectation, Goals, and Actions.

Question 9

When entering a position, how is the number of shares determined?

Answer 9

Multiply the portfolio value by 1%. Take that number and divide it by the “at risk” amount per share. Round down to the nearest hundred. Example: 100K account value time 1% is 1K. At risk amount per share in XYZ stock is $5. 1K/5=200. Position size should therefore be 200 shares and 2 puts.

Question 10

What is income method number 1?

Answer 10

Selling a covered Call (Creating a collar)

Question 11

What is the CEGA model for income method number 1? And the catastrophe report?

Answer 11

Conditions – You are in a married put and want to cancel some of the risk you took on at the inception. Additionally, the call can be sold for => the put strike price and the premium 1/3 to 1/2 the AT RISK value.
Expectation – Price of the underlying stock will not exceed the strike price of the call you’re selling by more than the premium you collect within the time to expiry.
Goals – Income in the near term to reduce risk, but don’t necessarily want to get called out yet.
Action: Sell to open a near term call or calls covered by the corresponding number of shared in the married put.

Catastrophe report:

a. If the stock’s price finishes below the lower strike calls, you have received income, have no obligations, and your AT RISK amount has been lowered or eliminated.
b. If the price of the underlying stock moves up, the short call obligates you to deliver the stock at the strike price. Can you do this at a profit or very small loss?

Question 12

What are the guidelines for income method number 1?

Answer 12

1. Sell the call OTM to allow room for growth.
2. Choose a strike price that is at or greater than the married put strike price.
3. Keep the time of expiration short, less than 10 weeks out in time.
4. Target a premium of about 1% of the sock price per month.
5. Make sure to generate 1/3rd to 1/2 of the AT RISK amount.

Question 13

When income method number 1 is in place, what do you do if the stock moves up, down, sideways?

Answer 13

If the stock moves down, consider buying back the short call or just let it expire worthless.
If the stock trades sideways, just let the option expire worthless.
If the stock moves up, use income method number 2(roll out call) if you want to keep the position OR use income method number 3 (Pull in Put) to maximize returns.

Question 14

After opening a married put position and before using any income method, what do you do?

Answer 14

Wait for the stock to move in a clear direction.

Question 15

What is a position trade?

Answer 15

A simple buy and hold with the intent to hold longer than 30 days.

Question 16

What happens when an income method is used on a married put position?

Answer 16

We give up either 1) control or 2) part of the maximum profit. Any time we apply an income method, we give up something at the same time we lock something in.

Question 17

How is the married put position entered?

Answer 17

With a limit order. Try using the midpoint (bid/ask) of the stock and slightly higher than the current bid of the Put. Then slow increase the amount.

Question 18

What is income method number 2?

Answer 18

Rolling the call from income method number 1.

Question 19

What is the CEGA model for income method number 2? And the catastrophe report?

Answer 19

C: A call have been sold against the married put at the same or higher strike price as the protective put’s strike price. Now, the price of the underlying stock is approaching or has risen above the strike price of the call.
E: The stock will continue to rise.
G: Growth – willing to hold the stock for a time to let the price develop.
A: Buy back the short call, simultaneously sell a call further UP and OUT, while at the same time collecting cash in your account or at least spending nothing.

Catastrophe:

a. If the underlying stock crashes, will we be in a worse position than before?
b. If the underlying stock goes up, will we be called out at a more desirable price?
c. What other income methods are available?

Question 20

What is income method number 3?

Answer 20

Rolling the Put in (time)

Question 21

What is the CEGA model for income method number 3? And the catastrophe report?

Answer 21

C: The price of the underlying stock is approaching or has risen above the strike price of the protective put. A call may or may not have already been sold against the stock.
E: Uncertain. If a call has been sold, IM#3 can be applied with good results for a short term return as an action in light of what has already happened. If a call has not been sold and news is expected that could send a stock either way fast, IM#3 can bulletproof the stock but still capitalize on an upward move.
G: Income – willing to get out in the near term, with good return for the time invested.
A: Sell the protective put and buy a different one at the same strike price, but near to expiry.
Catastrophe: You’re essentially deciding to close your position early by moving in the expiration date. The worse possible thing that can happen is that your stock waits until after that date, and then appreciates further but without you.

Question 22

In what two different ways can income method 3 be used?

Answer 22

1. It can augment the return on a position that has a cold sold against it when holding for growth.
2. It can also be used to bulletproof a stock that’s up and look like it may go further(or crash) in the short term.

Question 23

When is the best time to use income method 3?

Answer 23

It’s best used when the near term is very uncertain (EARNINGS REPORT)

Question 24

How does the author of the radioactive trading method use charts?

Answer 24

1. Enter RPM’s on an upward breakout (See IBD)
2. Close it if the stock’s price breaks out to the downside and sustains a downward trend.
3. Buy stuff (including buying to close short calls) near the bottom of the channel as it’s starting back up.
4. Sell stuff (including selling to open a call) as the stock bounces a little down from the resistance.
5. During a breakout to the upside, use income methods 3 and 4. Roll the put IN or UP/OUT.

Question 25

What is income method number 4?

Answer 25

Roll the Put UP

Question 26

What is the CEGA model for income method number 4? And the catastrophe report?

Answer 26

C: The price of the underlying stock is approaching or has risen above the strike of the protective put. There is no open call contract sold against the stock at this time. E: Stock will continue trading up or turn flat. G: Growth -- you want to hold the stock to capitalize on a longer-term move, but want to make your RPM bulletproof. It can now become a source of ready cash for other trade or investments, while capitalizing on the continued use of IM#1, #2, #5 and #6. A: Sell the protective put and buy another one deeper in the money...and maybe further out in time. Catastrophe: The worst possible outcome is if the stock trades sideways until the put's expiration: unless you use other income methods, you end up with the same result as if the stock went down. Only use this one to make an RPM bulletproof.

Question 27

When should method number 4 be applied?

Answer 27

When the protective put is at the money.

Question 28

What is the trade off in method number 4?

Answer 28

You put money into the position in order to lock in a higher strike price of the protective put.

Question 29

What is the rule of thumb for income method number 4?

Answer 29

Make sure the debit you pay for the move is less than 60% of the difference in strike prices. Example, pay no more than $3 for a 5 point strike delta.

Question 30

What is income method number 5?

Answer 30

A ratio call spread (similar to Stock Repair)

Question 31

What is the CEGA model for income method number 5? And the catastrophe report?

Answer 31

C: The sold calls are one strike or more above the call that is purchased, and the sold call premium is more than half of the price of the long call. E: The stock's price at expiry will finish at or near the strike price of the sold calls. G: Income -- with a little extra punch for a stock that's holding its value. A: BTO near term ATM or ITM calls, then sell twice as many calls with the same expiration date but one strike up. Catastrophe: If the stock's price finishes below all the calls, we have received income and have no obligations-- no problem there. a. ) If the stock's price finishes between the strikes (above the purchased call strike price but below the sold calls strike price. The short calls will expire worthless, the net credit remains in your account and the long calls can be sold for extra income. b. ) If the price of the underlying finishes above the strike price of the upper calls, the bull call debit spread will reach full profit but one of the sold calls must be managed with IM#2 or the RPM should be closed. Can this be done at a profit?

Question 32

When should method 5 be used instead of another method?

Answer 32

If you want to get as high a return in as short a time as possible, then this method may be a good choice. If you would like to hold on for the long haul, then move to IM#6 or some other method.

Question 33

What is income method number 6?

Answer 33

Bear call credit spread

Question 34

What is the CEGA model for income method number 6? And the catastrophe report?

Answer 34

C: Stock is trading sideways or maybe down. The decay of the protective put's time value may soon become an issue. Make a decision about getting some income NOW or close the position. E: Uncertain. If things go the way they have been (flat or a bit down), it would be good to pick up a little income. However, the stock could break to the upside so we don't want to just sell a call. G: Income in the near term, but don't necessarily want to get called out yet. A: But to open a near term, higher strike price call option, then sell to open a call option with the same expiry but one strike lower. Catastrophe: If the stock's price finishes below the lower strike call, we have received income and no obligations -- no problem. There are two other possibilities: a. ) If the stock's price at expiration is between the strikes or at the value of the higher strike, the long call will have no value and we'll be faced with the possibility of delivering the stock. Can this be done without loss? b. ) If the price of the underlying suddenly moves up, the short call may be managed with IM#2 and the long call sold for cash. Can this be done at a profit? Would it be better to close the RPM by selling the put or by using IM#3?

Question 35

What are the two sacred maxims of RadioActive Trading?

Answer 35

1. Don't pick stocks, pick stops. | 2. Don't time trades, trade TIME.

Question 36

What are some considerations for setting up income method number 6?

Answer 36

Sell a call ATM or very nearly ATM. Buy a call OTM, one strike up and same expiration date. 1. ) Make sure the sold call is at or above the protective put strike price. 2. ) It is best to collect a credit that is at least half of the difference in strike prices: a) For a 2.5 point spread, try to collect at least $1.25. b) For a 5 point spread, try to get at least $2.50.