Good Ways to Reinvest Those Newly Found Profits
Wednesday, June 20th, 2007
By George Leong, B.Comm. for Profit Confidential
One of the most important tenets of trading is to have a strategy on when to take some profits. With the recent rally, the DOW has surged back above 13,600 while the NASDAQ is trading at above 2,600. This may be another opportunity to take some profits, given that we could see some profit taking in the upcoming sessions.
Given the uncertainty of the rally, you want to make sure you don’t leave yourself exposed. If you own stocks or index securities that have made some decent gains, you might be wondering what to do. For instance, let’s assume you own a basket of technology stocks that have moved in line with, or better than, the overall markets. A good strategy would be to take some profits. At the same time, you do not want to miss out on any potential gains that may occur as we move into what may be decent earnings in the third and fourth quarters.
A simple strategy that you may want to consider is to take some profits off the table and then use some of the profits to buy index call options — a bullish play on a stock index.
First, take some profits on your basket of stocks. Second, buy some index calls so that you will continue to partake in any further upside moves in the markets.
The best thing about options is the leverage involved. For a fraction of the value of the index, you can trade the index and take advantage of the gains. In this way, you can take some profits and sleep well at night. At the same time, you would benefit should stock markets continue to rise. You can also play index call options on the NASDAQ, S&P 500, Russell 2000, or DOW. There are also numerous other index options you can buy, depending on what you want to trade.
Should the market continue to rally, you would benefit from the index calls. If the market sinks, you would have already realized some profits and would only lose the premium you paid for the index call option. In my view, it is a win/win situation for you.
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Tags: corporate profits, DOW, stock market
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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.
