Say you’re sitting on a winner with a tidy profit. But you’re unsure what to do next…
Do you take that gain off the table… or hold on for an even bigger potential profit ahead?
The dilemma can lead to frustration – especially if you make the wrong call. But that’s where options can be such a handy tool…
Consider a popular options strategy called a “roll.”
On Friday, we discussed how rolling options can give you a second bite at a trade that hasn’t worked out as planned.
So today, I want to show how you can use the same strategy to lock in a profit… and maintain exposure to more upside…
Double Goals
If you’re bullish on a stock, the most obvious strategy is to buy shares. However, a good alternative is to buy a call option. (A call option increases in value when the underlying stock rallies.)
A call option gives you exposure to an upward move in a stock for just a fraction of the cost of buying the shares.
The trade-off is that your option will expire. So you’ve got to get the move you’re anticipating before the expiration date.
Yet one of the other benefits of buying a call option is flexibility.
If the stock soars and hands you a win, you can sell your call option, locking in your profits. But what if you think the up move isn’t done yet?
That’s when you might buy a new call option to capture additional upside.
In effect, you can double-dip on the trade.
So, let’s check out an example to see how it works…
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Further Upside
Let’s check out the Invesco QQQ Trust Series 1 (QQQ) chart below. (Please note that this is just an example, not a recommendation.)
QQQ rallied off a higher low in April. So let’s say you bought a call option to capture the emerging up move, and the trade goes as planned…
Invesco QQQ Trust Series 1 (QQQ)
Source: eSignal
QQQ continues to rally, but that rally stalled as we got into May.
Worried about giving up those gains, you decide to sell your call option to lock in your profit. But you’re also optimistic that the up move could continue. You don’t want to miss out on more profits. So at the same time, you open a new call option position.
And again, you get the direction right…
QQQ resumed its rally, but it faded around the middle of May. So you decided to exit the second call option to take your new profits off the table.
And this is where flexibility comes to light. At this point, you can…
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Simply keep your two rounds of profits.
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Roll your call option into a new call option to capture any further upside.
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If you’re now bearish, you could open a put option position (a put option increases in value when the underlying stock falls).
The beauty of options is that you can adjust your strategy to reflect your view of the market.
So next time you’re bullish on a stock, consider buying a call option instead of shares. That way, you can test out rolling your option for multiple rounds of profit as the up move occurs.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
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