How to protect profits with options?

Wouldn’t it be great if, after profiting from a nice trend, you were able to guarantee your profits to be safe from any market actions?

You can place a stop to guarantee an exit from the market. However, where the exit occurs is up to the market, not to you.

With a stop, you are subject to opening gaps that can jump over your stop. If you place your stop at an 8% loss, the potential exists for getting stopped out much lower. There is no guarantee with a stop. You can protect profits with options if you want a guarantee, specifically a Put when you are long a stock.

Protect profits with options

If you want an 8% guaranteed stop loss, then purchase an ITM (in-the-money) Put that will net an 8% cost. If you had purchased a stock at $25, and it is now $40, wouldn’t it be nice to guarantee the $15 profit? I mean really guarantee – so that you, not the market, are in control.

First, the guarantee doesn’t last forever. You’ll have to take your profit eventually. To set up this guarantee, search the Put options for an approximate 8% real cost (the premium you have to pay in order to buy the Put). For example, the stock is at $40 and you’ve searched and found a Put option with a premium of $8.20, a strike price of $45, and it expires 4 months from now. How does this equate to an 8% loss guarantee?

Protect profits with options - Options Trading Education

The stock could fall to zero, but you would still be able to sell at $45. If the stock rises above your Put, you can still sell the stock and close the Put.

Using a Put to protect profits with options places you, not the market, in the driver’s seat. You can also employ additional option strategies to create even more profit.
Share