The Story
This week I talked about how Cohen filed to sell his $BBBY shares completely and how $BBBY could see sub $10 by next week.
Day 1: Stock dropped from 26 to 23 at close
Day 2: Stock open at 18.50 pops to 20.50 drops to 16.50 and closes at 18.50. After hours it has dropped to 11.80 so far.
If you took 10 contracts of 17@$1 (cost of $1000) and they now have an intrinsic value of $5.20 ($5200) -- how do you lock that in?
The Problem:
Many times big moves happen overnight but by morning we don't know what the price will be and we might want to lock in some or all the gains but the option market is closed!!!
I've been in positions overnight where the gains are substantial but by morning I'm red. So how do i secure those gains and reduce any additional overnight risk?
The Solution:
The solution is very easy when it comes to locking gains on puts and a little more complicated to lock in on calls, but same concept. The solution is to use common shares!
So in the scenario above. if you want to lock in gains at $11.80 then you can buy 1000 shares of BBBY at 11.80. if the stock drops under $10 your puts protect you from any loss, if the stock opens at $15 in the morning, you will have $3200 in gains in commons shares and approximately $2000 in put value.
Or perhaps you want to let it ride, you could buy 200 shares at $12 to secure $1000 profit which pay for your contracts and still have 8 contracts to ride, with a risk free position.
There are many nuances to this concept, but I have used this successfully to secure gains, reduce risk, and be very thankful for doing this.
Good luck and happy trading!!
--Spectre
PS. Forgive any typos or lack of clarity if I botched it.... I rushed this post out in case it helps others. Overall I do think BBBY sees sub $10 by morning. This is an amazing technique that I hope will help you in the future.
