Methods for Protecting Profits

mikeg · 12 November 2006

Any Trading Stategies using Options, Warrants, or whatever, to my dilema below would be greatly appreciated.

I own some resource shares that have gone up to a point where my emotions are now starting to take control. When they where at a lower level, I was happy to ride out the ups and downs, but now that I have a substantial paper profit, and am afraid of losing it, every fall in the share price ups my stress level.

I am hesitant to sell at this stage, for a few reasons, one being CGT, another is that there have been takeover rumors, so I don't want to miss out on that, I also think they have the potential to keep rising over the next couple of years. But if Metal prices crash, then my profits could be wiped out very quickly. So any thoughts on how to lock in profits without a huge expense would be greatly appreciated.

nizar · 12 November 2006

mikeg said:
Any Trading Stategies using Options, Warrants, or whatever, to my dilema below would be greatly appreciated.

I own some resource shares that have gone up to a point where my emotions are now starting to take control. When they where at a lower level, I was happy to ride out the ups and downs, but now that I have a substantial paper profit, and am afraid of losing it, every fall in the share price ups my stress level.

I am hesitant to sell at this stage, for a few reasons, one being CGT, another is that there have been takeover rumors, so I don't want to miss out on that, I also think they have the potential to keep rising over the next couple of years. But if Metal prices crash, then my profits could be wiped out very quickly. So any thoughts on how to lock in profits without a huge expense would be greatly appreciated.

You cant have everything.
I think substantial paper profits should be locked in, but thats only my personal opinion. But then you have to deal with tax.

Put it this way; if u dont have a tax problem you're not making money.

sails · 12 November 2006

mikeg said:
Any Trading Stategies using Options, Warrants, or whatever, to my dilema below would be greatly appreciated.

I own some resource shares that have gone up to a point where my emotions are now starting to take control. When they where at a lower level, I was happy to ride out the ups and downs, but now that I have a substantial paper profit, and am afraid of losing it, every fall in the share price ups my stress level.

I am hesitant to sell at this stage, for a few reasons, one being CGT, another is that there have been takeover rumors, so I don't want to miss out on that, I also think they have the potential to keep rising over the next couple of years. But if Metal prices crash, then my profits could be wiped out very quickly. So any thoughts on how to lock in profits without a huge expense would be greatly appreciated.

Hi Mikeg,

The collar is an options strategy that can be used for this purpose and is the purchase of a put option (works like insurance) and the sale of a call option to help offset the put purchase.

The main advantage is that it can be a low cost method (sometimes no cost or even done at a credit) to protect your shares without physically having to sell them.

The main disadvantage is that the sold call will cap any further profits beyond the sold call strike.

There are many choices of option strikes to allow a collar to be more bullish or bearish - but that ususally comes as a trade off to taking on more risk.

Here is some further reading if you are interested:
http://www.asx.com.au/investor/options/how/library/2003/StrategyofWeek220803_AM4.htm
http://www.888options.com/strategy/collar.jsp
http://www.cboe.com/Strategies/EquityOptions/EquityCollars/Part1.aspx
http://www.optionetics.com/market/articles/9834

Cheers,
Margaret

mikeg · 13 November 2006

Thanks for the advice.
I received a message from someone who had done a "Collar" on WMC and the Sold Call was $5.25. Takeover offer came and the price went to $7, hence they missed out on a lot of profit, which is one of my concerns.

So I am thinking that I will buy a long dated put, and sell short term puts below the bought.

It's Snake Pliskin · 29 December 2006

mikeg said:
Thanks for the advice.
I received a message from someone who had done a "Collar" on WMC and the Sold Call was $5.25. Takeover offer came and the price went to $7, hence they missed out on a lot of profit, which is one of my concerns.

So I am thinking that I will buy a long dated put, and sell short term puts below the bought.

Nothing on this forum is advice.

sails · 29 December 2006

It's Snake Pliskin said:
Nothing on this forum is advice.

Thanks for picking that up, Snake.
My post was certainly never intended as advice and actually only contained general info on a well known options strategy!

It's Snake Pliskin · 29 December 2006

sails said:
Thanks for picking that up, Snake.
My post was certainly never intended as advice and actually only contained general info on a well known options strategy!

No worries Sails, I was just doing some "voluntary" moderating. I see people saying such things so often when it is clearly stipulated that no one can give advice unless they display their qualifications, number etc.

Kaizen · 9 January 2007

mikeg said:
Any Trading Stategies using Options, Warrants, or whatever, to my dilema below would be greatly appreciated.

I own some resource shares that have gone up to a point where my emotions are now starting to take control. When they where at a lower level, I was happy to ride out the ups and downs, but now that I have a substantial paper profit, and am afraid of losing it, every fall in the share price ups my stress level.

I am hesitant to sell at this stage, for a few reasons, one being CGT, another is that there have been takeover rumors, so I don't want to miss out on that, I also think they have the potential to keep rising over the next couple of years. But if Metal prices crash, then my profits could be wiped out very quickly. So any thoughts on how to lock in profits without a huge expense would be greatly appreciated.

Stop looking at them... If they are solid companies then they will look after themselves.

wayneL · 9 January 2007

mikeg said:
So I am thinking that I will buy a long dated put, and sell short term puts below the bought.

This strategy will not protect profits. You are protecting your stock with the long put and re-introducing risk with the short.

tech/a · 9 January 2007

Put in place an exit.

If its hit then get out.

By the way out of the market is a position,just as valid as Buy,Hold,or Sell.

wayneL · 9 January 2007

A quick comparison between exit/stops and option strategies.

The investor may not want to sell exits may precipitate a CGT event. Once exited, there is nothing to stop the stock to turn around and continue rising... without you.

However, an exit is simple, clean, easy to manage and requires no additional expertise.

Options allow the investor to remain in the stock, whilst protecting profits. The stock can continue rising and you will still own it. You can use options to enhance ownership of the share, benefit from down moves etc.

This comes at a cost. Obviously put option premium comes straight off the bottom line, whether used or not. And I believe that one should spend the time to learn options theory if utilizing options jiu jitsu. This will entail some expense (and fugawdssake don't pay through the nose for some hyped up, crappy and useless seminar) and time.... possibly a mental breakdown or two.

My $0.015

stevo · 9 January 2007

If they are solid companies then they will look after themselves.

Kaizen - Ahhh, that's a big "if" in the resource sector!

We are talking companies that sell stuff that they dig or pump out of the ground. They are selling commodities! I am not sure that I would consider many (if any) resource companies to be companies in the Warren Buffett category. Gold is gold regardless of the mine it comes out of. If the price of the commodity falls then the companies all tend to fall together.

None of my exits have been triggered yet in the latest minor fluctuations.

Mike - I'd be interested in knowing what you consider a "substantial paper profit" - 100%, 200%, 300%, 400%???

It's Snake Pliskin · 10 January 2007

stevo said:
If the price of the commodity falls then the companies all tend to fall together.

..or you could use the companies as a barometer for trading the commodity.

Kaizen · 10 January 2007

Use a protected equity loan to lock in the position and get the cash out at the same time, plus you get a tax deduction for the interest paid.

sails · 10 January 2007

Kaizen said:
Use a protected equity loan to lock in the position and get the cash out at the same time, plus you get a tax deduction for the interest paid.

I was speaking to a rep from one of the larger margin lenders in Aus a couple of years ago and among other things I asked about their equity protection scheme. He said "if you know about options, just buy long dated puts - that's all we do"! At least he was honest! On comparing the two at that time, it was considerably cheaper to buy the puts. However, an understanding of IV would be essential here (i.e. buy shorter dated puts (could also offset the cost with otm short calls) if IV's are high and roll to longer dated puts when IV's are near their lows).

Kaizen, what is the advantage of getting your own funds out and then putting them into the bank at possibly half the interest the margin lender is going to charge? Even with the highest tax deductions available, it is only going to roughly break even

Kaizen · 10 January 2007

Who said you need to put it in the bank? With 1900+ stocks on ASX I am sure you could find something out there. What about buying some defensive stocks TTS or WOW? They pay dividends to cover some of the interest cost and give potential upside.

Buying a put is the same but you do not get access to your cash.

sails · 10 January 2007

Fair enough if you're happy for the funds to be at risk again in the market.
My apologies if I have misunderstood, however my last post was written with the topic of this thread in mind "methods for protecting profits" rather than discussing increased leverage (and risk) with margin lending.

Methods for Protecting Profits

mikeg

nizar

sails

mikeg

It's Snake Pliskin

sails

It's Snake Pliskin

Kaizen

wayneL

VIVA LA LIBERTAD, CARAJO!

tech/a

No Ordinary Duck

wayneL

VIVA LA LIBERTAD, CARAJO!

stevo

It's Snake Pliskin

Kaizen

sails

Kaizen

sails

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