Since 9/30/2010, our retirement savings accounts have gained 10%. Most of that gain (8%) has been due to a rise of my company stock. While I am happy about the gain, I am concerned about how quickly it has happened. My company's stock could easily decline by the same amount before the end of the year and eliminate the gain.
Since over 40% of our savings is in some form of company stock, I definitely want to protect the gain. Last month, I developed a plan to reduce our exposure to company stock which has already been implemented. However, if the stock market continues to rise , we may need to accelerate one part of the plan.
At this point, I would like to avoid executing any stock options until 2011 for tax planning reasons. However, if my company stock continues to increase, I would also like to lock in some of the gains. To manage the tradeoff, I am considering selling in-the-money naked calls. This would protect the gain and allow us to wait until 2011 to execute the options. The downside is that a call would cap the maximum gain that could be achieved.
Next week, I will check with my financial advisor on other ideas that could help with the tradeoff.
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I've re-read this post several times, but I am a bit confused. How does selling calls, naked or otherwise, protect your gain?
ReplyDeleteI must admit that I don't fully understand some advanced option techniques. So, any clarification you can provide would be appreciated.
PF Stock,
ReplyDeleteThanks for the comment. I will do a more detailed post on the subject in the next couple weeks.
Briefly, here is an example of how selling an in-the-money call protects the gains. If I buy a stock at $25 and it rises to $40, I could sell the stock and make $15. However, I want to delay taking the gain until 2011 and I believe the stock may decline significantly. Instead, I sell a 25 call expiring in January 2011 for $15.50 and guarantee a profit of $15.50, as long as the stock doesn't fall below $25. Of course, if the stock rises to $60, I forgo all of the additional gain over $40.50 since I am obligated to sell at $25.