Monday, September 22nd, 2014

Use Puts to Protect Profits

 

A good idea when you have a stock that has had a good run up is to use puts to protect profits. When the stock market has had a good run it is always time for the investor to look to protecting his profits. In fact, the old saying is that you do not have a profit unless you take a profit. There are two ways to do this. You can sell stock or you can use puts to protect profits. When the investor thinks that a stock still has a fair amount of upside potential but is also due for a temporary correction he can use puts to protect profits. Only when an investor thinks that a stock is entirely overbought and is due for a permanent fall in price will he sell stock and totally exit the position. Buying puts on a rapidly rising stock in a volatile market has been a successful strategy in long term investing over the years. This is an especially valuable strategy for traders and investors who have gotten into stocks very early and have seen them grow substantially. By buying puts in stock options trading they retain the stock in case it goes up farther in price but buy insurance against a possible collapse in the stock price.

Use Puts to Protect Profits and Calls to Guarantee a Piece of Profits

It makes sense to use puts to protect profits in a volatile market. In this case the stock prices may go up and may go down. If a trader wants to trade options on such a stock buying calls and puts on the same stock with the same expiration date covers both the possibility of a rise and a fall in stock price. The trader pays two premiums but incurs no further risk. This strategy is called a long straddle. When one owns the stock in question then there is no need for calls on the stock but to use puts to protect profits still makes sense. Smart traders and investors can use technical analysis tools such as Candlestick pattern formations to accurately anticipate a market reversal. By astute Candlestick analysis the trader will have his puts, and his peace of mind, in place when the market goes crazy.

Careful Analysis Pays Off

When everyone seems to want to buy stock, regardless of price, the investor who had the foresight through fundamental analysis of a stock as well as technical analysis of the market to buy stock early will be looking to take his profit. So, why doesn’t the investor or trader just sell the stock? Because market sentiment is still positive and the stock may still go up substantially in price. Using Candlestick chart analysis the investor knows that the stock will go up in price and knows that the price will correct, probably very substantially. Selling stock will forego profits in the last surge in the stock price. Waiting too long will mean incurring a loss. Using a put on the stock guarantees that the investor will sell the stock at the strike price, the contract price, even after the stock has fallen in price! He can then just keep his profits or he can now repurchase the stock at the now lower spot price, the new market price. If his Candlestick chart formations predict a renewed rise in stock price this is what he will profitably do.

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