Many of you are probably facing a dilemma now, given the recent surge in the stock market since mid-October. With the year-end repositioning of portfolios closing in, you may be thinking about selling some of your losers for a capital loss and taking some profits. The DOW and S&P 500 are up over 8% since mid- October, while the NASDAQ has gained nearly 12% in that time.
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 NASDAQ. A good
strategy would be to take some profits. At the same time, you do not want to miss out of any potential gains that may occur towards the year-end and into 2006. A simple strategy that you may want to consider is to take some profits off the table prior to the year-end and 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 tech stocks. Second, buy some index calls on the NASDAQ, so that you will continue to partake in any further upside moves in the index. 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 the NASDAQ continue to rise. You can also play index call options on the 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.