Options Trades When You're Sitting on a Big Profit
The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK ( TheStreet) -- Many long-term investors concern themselves with leaving money on the table. I get emails daily from readers and subscribers to my Options Investing Newsletter expressing considerable worry over issues such as: I bought Apple(AAPL) at 350, but I am afraid to sell because it might go higher or how do you decide where to set a profit target on a long position?
You can alleviate some of that worry by squeezing more income out of your positions. Just as a dividend can help enhance gains, make a stagnant position somewhat worthwhile or offset losses during periods of weakness, options-generated income can accomplish all of the above and give you the incentive you might require to stick to your intended long-term investment.
This situation does not apply only to Apple. In this bull market environment, plenty of stocks have run away from longs. It's a good "problem" to have. Stocks ranging from Chipotle Mexican Grill (CMG) to Priceline.com(PCLN) have taken off, leaving investors, who thought they were buying a company to retire with, with massive gains that are often too hefty to pass up.
In this article, I consider several hypothetical, yet likely somewhat common scenarios. I offer ways to use options to generate income to offset any trimming of profits that might arise as a result of temporary or more persistent downside.
Consider the following two qualifiers: One, it's never a bad idea to take money off of the table. I do not consider it a bad thing to have closed the books on a trade for considerable profit only to see the stock run. For every time that happens, you can likely count several times where you did not act with discipline and ended profiting less or even losing money. Two, I use examples to illustrate basic options strategies. While I can make the case for each, I do not necessarily endorse each trade; every investor has his or her own circumstances. A trade might work for one person, but not the next.
So you loaded up on Chipotle way back at the beginning of the year at 350. You went into the trade treating it like a long-term investment. You believe in the company's future, therefore you're taking this one with you until retirement. Fast forward to today and the stock trades for 420. That's a 20% gain and on-paper profits totaling $35,000 on 500 shares. It's tough to pass up banking an amount of money most people do not make in a year.