Sitting on a Large Profit and Not Sure What to Do? Here’s How to Protect It...

[Trading With Larry Benedict]( Sitting on a Large Profit and Not Sure What to Do? Here’s How to Protect It… By Larry Benedict, editor, Trading With Larry Benedict We’ve seen huge gains in tech stocks this year. So you may be sitting on outsized gains… and nervous about giving back a chunk of those profits if the market goes south. One way to protect yourself from potential falls is an options strategy called a “collar” – also called a “protective collar.” A collar is a two-pronged strategy. You buy put options to protect yourself against a stock falling. To help fund the purchase of those puts, you also write (sell) call options. Depending on the strike prices of the put and call options, you can work the strategy so that there is little to no financial outlay involved. You might even generate a credit. So today, let’s take a closer look at how to use this strategy. To see how it works, we’ll consider Netflix (NFLX), which has been on an absolute tear. (Please note that this is an illustration, not a recommendation.) Recommended Link [Financial advice for the next 5 years]( [image]( He made $95 million during the 2008 financial crisis. He predicted the 2022 stock market collapse… telling a reporter, “All indexes would be negative for the year,” days before everything crashed. For these exploits and more, Barron’s ranked his hedge fund among the top 1%. Now he says a new crisis is fast approaching that could determine the direction of your wealth for the next five years. [Click here for details…]( -- Protecting Your Profits NFLX is trading around $445. And the Relative Strength Index (RSI) says that it is overbought (red circle in the chart below). So you may be worried that it is vulnerable to a fall. If you are sitting on sizeable gains, you decide that you want to protect your profits… One way to do that is by buying a put option. By buying a put option (“1” on the chart), you lock in a strike price. If the stock falls below that price, you can still sell your NFLX shares for the strike price and protect your profits. Netflix (NFLX) [chart] Source: e-Signal As the option buyer, the right to exercise that option and sell your shares is yours. For that right, you pay a premium – the cost of the put options. In our example, you decide that you want to buy a put option with a strike price of $420 with one month until expiry. That costs you $15. So you can sell your NFLX shares at $420 until the option expires in a month’s time. At 100 shares per options contract, that $15 equates to $1,500 per contract plus any broker’s commission. Keep in mind, the price of the premium increases the closer the strike price is to the current share price and the further out the expiry date is. For comparison, a put option with a $430 strike price and two months until expiry might cost roughly $25 – or $2,500 per contract. And this is where our second leg of the strategy comes in to help reduce this expense… Free Trading Resources Have you checked out Larry's free trading resources on his website? It contains a full trading glossary to help kickstart your trading career – at zero cost to you. Just [click here]( to check it out. Offset the Cost To help offset the cost of buying your put options, you decide to add another leg. You write a call option (“2” on the chart). Take another look: Netflix (NFLX) [chart] Source: e-Signal The important thing to remember is that writing options comes with obligations… In this example, you could write (sell) your call options at $440. If the buyer exercises the options, you will have to sell them your shares at $440 – even if the stock price is trading much higher. So in this collar trade, you decide to reduce the chance of the options being exercised by writing them at a strike price of $470. In exchange, you receive $15 (or $1,500 per contract), less any broker’s commissions. (Note that you need to use the same expiry dates for both your bought put and written call options. You also need to place your trades simultaneously.) In this case, the premium received from writing the call options offsets the cost of buying the put options. Yet as I mentioned, this collar strategy comes with an obligation – and thus a limitation. If NFLX continues to rally, then you are locked into selling your shares at $470 – even if NFLX jumped to $500 or higher. So by writing your call options, you are giving up potential profits if NFLX continues to soar. But remember that the reason you are doing this collar strategy is to protect existing profits from a stock that looks vulnerable to a fall. If NFLX tanks down to $380 or even lower, then you can still sell your shares at $420 right up until the option expires. Regards, Larry Benedict Editor, Trading With Larry Benedict Mailbag Have you ever used a collar strategy? Share your experience with us at feedback@opportunistictrader.com. IN CASE YOU MISSED IT… [My #1 trade for June]( “I’m going to show you a retirement method that’s unlike anything you’ve ever seen. It has nothing to do with “buy and hold.” In fact, it has nothing to do with any “traditional” investments, like stocks and bonds. In short: it’s a way to trade one unique type of investment over and over again… and potentially make all the money you need to fund your retirement. 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