An ideal solution is to sell ? of the shares to recover most of the original principal and use a portion of the profits to purchase a CMG Put option to lock in gains on the remainder. From the previous article we remember that in the money options have a higher delta which means they are more sensitive to changes in the stock price. Because no matter how far the CMG stock trades under the strike price, you would still have a right to exercise the option and sell your shares at the strike.
If you felt that CMG had found price support here at the $300 level and was done with its correction, you could sell your put to close the initial option position and buy a lower strike put farther out in the calendar (i.e. The net profits going forward from continued CMG appreciation would be greater since you had taken a bunch of option premium off the table and switched from a very deep in the money to an at the money put. Just be careful not to roll until you definitely have seen signs of price support and better odds of a sustained reversal higher.Profit from Stock Drop Using Speculative PutThe opportunity to buy a put option without owning CMG shares could have been used for a speculative directional trade in order to profit from an anticipated drop in CMG. Compare that to an attempt to short sell CMG stock where there could be unlimited losses and a great deal of trading capital tied up.
If you use puts to make defined risk directional short trades, stay small, be sure to calculate your breakeven point (Strike Price – Put Premium) and be very aware of the time value or Theta decay that reduces the price of the put and erodes your potential profit.In upcoming articles, we’ll explore more option portfolio protection strategies – writing covered calls, creating option collars, and introducing option spread trades.
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