How to Protect Your Stock Profits With a Simple Strategy?

The biggest fear many investors have in stock trading is losing their principal. The next big fear most investors have is to lose their profits. Now, this simple options trading strategy can insure your stock profits at almost zero cost so read on.

Let's say, you bought a stock ABC in January 2010 trading at $50 per share. Right now, it is trading at $75 per share. What this means you have an unrealized profit of $25 per share or what you can call a paper profit of $25 per share. As long as you don't sell the stock, this profit is unrealized.

One way is to sell the stock right now and realize your profits. But you are expecting a very good earnings reports that will further push the stock price up to $85 per share. You don't want to lose that additional $10 in profit per share. By using an options trading strategy known as a Collar, you can protect your profits are no or almost zero cost. Let's see how!

Let's say the earnings report will be released on 30th April. So you purchase an out of money PUT that gives you the right to sell the stock at $75 to protect against the stock prices going down unexpectedly on a bad earnings report. You finance that PUT by selling an out of money CALL that will let you sell the stock at $80 on the same stock with the same expiry as the PUT. Let's say both the PUT and the CALL expire on May 21st. So this insurance policy will protect your profits till that date.

In the case of a non event, you lose nothing. In case of a negative news, the PUT will protect you by giving you the right to sell the stock for $75 per share. However in case of an upside movement, your profit potential will be limited by the CALL. As the call was for $80, you will have to sell at $80.