Time for a Year-end Portfolio Review
If you have not already done so, you may want to take a close look at your portfolio holdings and maker adjustments where deemed necessary. With the final trading day for executing and clearing trades for 2007 around the corner, you need to sit down and take profits and losses in order to set yourself up for a new year of trading in 2008.
If you have winners, you could take all the profits, which I do not advise. A better alternative would be to take profits on a portion of each holding and let the remaining portion ride. In this way, you safeguard some of the original capital, so you do not have to worry as much about taking risk.
Another strategy if you are nervous about the short-term potential would be to write some covered calls on some of your holdings, which would generate some premium income as well as lower the average cost base of a particular position. Say you own 100 shares of eBay, Inc. (NASDAQ/EBAY) at an average cost of $30.00 per share. If you do not believe the stock will go up in the next month, you could write one contract (equates to 100 shares) of the January $32.50 out-of-the-money call at $1.15 per share or $115.00 for the one contract.
You would generate $1.15 per share in premium income in exchange for taking the risk that the buyer of the call option would exercise the 100 shares of eBay you hold. But if eBay fails to move above the $32.50 strike price by the January 18, 2008 expiry date, your adjusted price per share would decline to $28.75 (excluding commissions). You can continue to write covered calls to generate income. Of course, if your position is exercised, you would still get $32.50 for each share.
Other strategies include buying put options or selling the entire position and buying long-term call options called LEAPS.
The bottom line is careful risk management, as well as understanding each position you have, forming a strategy for taking profits and protecting the downside.