Explore Your Options  |  NOV 2006

Explore Your Options by Tom Gentile

Stocks & Commodities V. 24:11 (62): Explore Your Options by Tom Gentile Got a question about options? Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com), an education and publishing firm dedicated to teaching investors how to minimize their risk while maximizing profits using options. To submit a question, post it to our website at http://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. ONE CALL, THAT’S ALL I bought my first call option on a stock and the trade is working out nicely. The stock is up almost 10% since I bought the option. I know I can close the trade and make a profit, but is there any way to protect some of the profits if I think the stock might rally even more? Sounds like a good situation to be in. If the stock has moved higher as you hoped and the call option has increased in value, there are adjustments you can make to lock in some or all of the profits. The best adjustment will depend on the situation, but one possible approach is to convert the straight call purchase into a bull call spread by selling a call option with a higher strike price. Here’s how that would work. Say XYZ is trading for $50 a share and I buy the XYZ December 55 call for $2.50 a contract. Now, suppose XYZ shares rally 10% to $55. In that case, the strategist has a profit of at least $2.50 a contract, which is equal to the current stock price ($55) minus the strike price (50) minus the cost of the trade $2.50. At that point, the strategist might choose to close out the trade for a 100% profit (or more if time value is remaining.)

by Tom Gentile