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Stock markets are at all time high and a lot of investors may be thinking of what to do with the profits they have made on stocks. If you are one of them, these are the things you can do:
1. Sell part of your holdings and book profits: This will help you to re-enter the stock if it falls again or you can get into another stock.
2. Sell all stocks and buy calls: Some investors do not want to sell their stock holdings thinking that it may go up even further. For them it is suggested to do the “Stock Replacement Strategy”. In this strategy, stock profits are taken and replaced by derivatives.
For example Mr. Amit bought a stock at 100 and now its at 200, he still feels that the stock will go up but do not want to miss out on the profits. So he sells the stock, book profits and buy one ATM call. Now this CE is bought from the profit made in the stock. If the stock moves up, Amit will profit from the Call bought else he can exit at a small loss. By doing this he has ensured booking profits in the stock at the right time, the loss in the call will not hurt much, but the joy in selling the stock at the right time will be more.
Some investors are reluctant to sell stocks they can do this:
3. Buy At The Money Puts: This is known as married puts to save the gains made from the stock or lock-in-the-profits. There is no point in doing married put strategy if you do not hold a lot of stocks (equal to lot size of the derivative of that stock) of a company. In that case its better to sell at least a part of the holdings. See point 1.
Or do this:
4. Buy Out of The Money Puts: If you do not hold enough stocks of a company but still want to lock in the profits you can buy slightly out of money puts. These are not exactly married puts, but will ensure at least partial profit booking even if the stock falls 10%. Out of the Money Puts will be slightly cheaper too and will not hurt your pocket.
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