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Long Option Profit-Taking Strategies

Every stockholder faces this dilemma: you bought stock several months ago and recently the price jumped, perhaps even more than you ever dared hope. Now what?

The dividend yield is very attractive and you would like to hold onto shares. The fundamentals are strong and steady. You believe long-term prospects for more growth are promising. In other words, there is every reason to just hold onto shares and take comfort knowing you have made a great choice.

Even so, that inside voice is telling you to take profits right now while you can. If the stock price dips you can always go back in at a bigger bargain. Take your profits.

This is not a good idea, and that more sensible voice of reason knows it. So how do you deal with the tendency to speculate on today's price swing? The impulse makes a good argument: If you don't take profits today, they might not be there tomorrow. You've seen it before. You hesitate and you lose. So sell!

You have the opposite problem when the price falls. You don't want to have any further losses, so maybe you should sell now and cut your losses. Conventional wisdom tells you this is the smart move if the stock is likely to continue downward. If you were wise when you picked stock, you know it is going to rebound. But still, what if it doesn't?

This is where options are so valuable. If you have done a good job of picking strong stocks to invest in, you know that selling when price move in either direction is not a smart move. And yet, you worry about price swings. The solution is to play the price spikes and dips with relatively modest option positions. When prices spike, buy insurance puts (one put per 100 shares), focusing on ATM or slightly ITM strikes. If you think price is going to move quickly, use puts expiring within one month or less; these have the least amount of time value.

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