Locking in Profit by Purchasing Options | StoneX (2024)

FAQs

Locking in Profit by Purchasing Options | StoneX? ›

The most common way to lock in profits using options is done by purchasing an out-of-the-money call or put wherever you'd like to lock in profit. An option gives you the right to buy or sell a futures contract from a specified price. If you are long a market, you would want to purchase a put to lock in profit.

Protecting Profits with Puts

Buying put options give you the right to sell a stock at a set price until the contract expires. As a result, you can purchase put options covering the number of shares you own to lock in profits. If the stock declines, you can still sell the stock at the put option's strike price.

An option buyer can make a substantial return on investment if the option trade works out. This is because a stock price can move significantly beyond the strike price. For this reason, option buyers often have greater (even unlimited) profit potential.

What Does Lock in Profits Mean? Locking in profits refers to the realization of previously unrealized gains accrued in a security by closing all or a portion of the holdings.

The time decay results in a loss for the option buyers and the option sellers profit from it. So, when you buy and sell options simultaneously, the time value that you lose in the bought option position will be offset by the gain in time value in the short option position. In this way, your losses can be minimized.

By purchasing a put option, any losses on the stock are limited or capped. The protective put sets a known floor price below which the investor will not continue to lose any added money even as the underlying asset's price continues to fall.

1. Long call. In this option trading strategy, the trader buys a call — referred to as “going long” a call — and expects the stock price to exceed the strike price by expiration. The upside on this trade is uncapped and traders can earn many times their initial investment if the stock soars.

Time decay (Theta): Options contracts have a limited lifespan, and as they approach expiration, their time value erodes rapidly. If the underlying asset's price doesn't move in the desired direction quickly enough, options buyers can incur significant losses due to time decay.

The put owner may exercise the option, selling the stock at the strike price. Or the owner can sell the put option to another buyer prior to expiration at fair market value. A put owner profits when the premium paid is lower than the difference between the strike price and stock price at option expiration.

If market conditions are choppy and decent gains are hard to come by, then you could exit the entire position. But if the market winds are favorable and your stock appears to be still in the early stages of its run, then go ahead and sell at least part of the position, such as a third or half, to lock in gains.

How to take profits from stocks without selling? ›

If you own an underlying stock or other security, a protective put position involves purchasing put options, on a share-for-share basis, on the same stock. This is in contrast to a covered call which involves selling a call on a stock you own.

A tried-and-true method involves simply selling half your stake in a stock once it doubles. That lets you take your initial investment off the table while remaining well able to benefit from any further increases.

For example, the wash sale rule doesn't apply if you sell stock or securities for a gain. So, if you profit from the sale of stock or securities, you can repurchase the same stock or securities right away without any penalty.

For those who don't want to wait, an example of downside protection would be the purchase of a put option for a particular stock, where it is known as a protective put. The put option gives the owner of the option the ability to sell the shares of the underlying stock at a price determined by the put's strike price.

A strangle is a popular options strategy that involves holding both a call and a put on the same underlying asset. A strangle covers investors who think an asset will move dramatically but are unsure of the direction. A strangle is profitable only if the underlying asset does swing sharply in price.

To profit by short selling put options, you must first identify a stock that you believe will increase in value. You can then sell a put option on that stock with a lower strike price. If the stock increases in value, the Option will expire, and you will be able to keep the option premium as profit.

How to Use Stop Loss in Option Trading. A stop-loss in options trading is like stop-loss in stock trading. You set the order at a certain trigger price. When the asset price crosses the stop, your online trading platform will attempt to trade your options contracts.