Holding On to This Winner

Let your winners run, but protect them. At least, that is one theory or approach. I have seen a few folks toss out the idea of covered calls on overbought or strong names that have run quite a bit, but I actually dislike that approach -- especially using out-of-the-money calls. But since that is a common strategy used by many traders, I think an explanation is warranted.

The idea is to sell the right to someone else to buy a stock you own at an agreed up price. So by selling an out-of-the-money call, you have the potential to earn a little scratch and even some more upside on a stock. The issue is your downside is only reduced by the amount of premium you take in. Traders often look to sell near-term expiration, so the premium will be small, perhaps 1%-2% give or take a bit, unless we are talking about a higher beta or volatile stock. So, for maybe 1%-2%, I cap my upside to maybe 2%-4% higher plus my premium. However, I don't eliminate my downside by any more than 1%-2%. I would rather approach it in a different manner, given the big run in the market already; however, it is still a strategy I would consider....432 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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