There are a handful of stocks that have gotten so expensive that it is cost prohibitive to the retail investor to buy them in round lots (100 shares). If you plan just to buy 137 shares of Priceline, (PCLN), and hold it for 10 years without looking at it then this may not be a big deal to you. But if you plan to hold it smartly, selling calls against it to collect income and protecting gains at various times, then it is impossible to deal with. Despite this Apple, (AAPL), is the most talked about stock all the time on StockTwits. Yet even down at $445, a trader with a million dollar account and a 10% allocation to it owns only 225 shares. Surprising.
Depth Of Volume
That surprise goes away when you look at the options chain and see the depth of volume in the near-month chain in these high priced stocks. Google, (GOOG), for example traded over 38,000 contracts in the options expiring tomorrow. People are trading these options like they are stocks. That can be ok if you are a day trader. But if you are a swing or position trader then it is important to realize that options are different. They decay over time and are affected by changes in volatility. A $10 call option today may be worth only $8 next week even if the stock went up in value. This can lead to stressful times.
I had a conversation with one such trader on twitter about just this and wanted to share it here as it shows how to deal with some of these added stresses. And actually can be better than trading stocks.
The question in a nutshell hits on both aspects above, time decay and volatility, but also the leverage involved. How to get comfortable when so much, 70% gains, are at risk in an instrument with a finite life that has its value derived from an asset that is still trending. My responses are below.
Generically There Are Three Choices:
- Take your Profits and call it a day
- Roll them up to a higher strike
- Spread them
I gave him specific information for his positions but there are instances when each is appropriate.
Take Your Profits: If the stock is stalling then this is your choice, just like if you owned the stock. You need to be decisive though because the ticking clock is eating your value too.
Roll Them Up: If the stock is continuing to trend then it is appropriate to sell your long calls and buy calls at a higher strike, rolling them up. This takes some profits and allows you to keep participating in an unconstrained uptrend.
Spread Them: By selling higher strike calls, spreading the existing calls, you also get back some profits and continue to participate in further upside price action. The difference is that your gains are now capped, so this is a good strategy for when there is strong overhead resistance near by but not yet.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
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