How to protect your stock profits with simple strategies?
Many investors in the stock trading the biggest fear is to lose their principal. The next big fear for most investors is to lose their profits. Now, this simple option trading strategy can guarantee that your stock profits are almost zero cost, so read it.
Suppose you bought ABC in January 2010 at a price of $ 50 per share. Now, it's trading at $ 75 a share. That means your unrealized profit is $ 25 per share, or you can call it a paper profit of $ 25 per share. As long as you do not sell the stock, this profit is unrealized
One way is to now sell the stock and realize your profits. But you expect a very good income report that will further push the stock up to $ 85 per share. You do not want to lose an extra $ 10 per share in profits. By using an option trading strategy called a collar, you can protect your profits with no or almost zero cost. Let's see how!
Let us say that the income report will be released on April 30th. So you buy a paid PUT that gives you the right to sell the stock for $ 75 to protect the stock price from accidentally declining bad income reports. You sell through the sale of a currency CALL to let you sell the same stock at $ 80 the same as the PUT. Assume PUT and CALL expire on May 21. So this insurance policy will protect your profits until that date
In the case of non-events, you will not lose anything. In the event of a negative message, PUT will protect you by giving you the right to sell the stock at a price of $ 75 per share. However, in the case of upward movement, your profit potential will be limited by the CALL. Because the call is $ 80, you must sell for $ 80