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Tesla Collar Update

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Last week I detailed a way for investors with a big accumulated profit in a stock to protect most of the gains using a “collar” in which they purchase a put and sell a call.

I used Tesla (TSLA - Free Report) as an example of a stock that had recently appreciated rapidly, but these same principles can be applied to a position in any stock.

Analyst price targets vary wildly, with some predicting a steep fall and others remaining wildly bullish – with the possibility of doubling again in the immediate future.

Obviously, no one knows exactly what’s going to happen with any certainty, but it’s likely that Tesla shares will remain volatile.

Over the past week, they’ve tacked on an additional 6% and are now at or above the $425 strike of the call in the protective collar. This leave a trader with a decision to make.

If Tesla stays above $425 through expiration, the shares will be called away. As an investor, if you’re happy with that level of profit and unsure about future performance, you can just let that happen.

If you’re still bullish on the company long-term, you’ll have to do something to avoid selling the shares. I’ve explained this before, but it fits exactly in this current situation, so I’m going to repeat it. One of the best ways to preserve more appreciation potential is to roll the trade “up and out.”

Here’s a recent article about that trade.

There are a couple more things you might want to consider.

First, you still own that 375 put. It up to you to decide whether you still want that protection or whether you’d rather sell it for whatever remaining value it has before time-decay renders it worthless.

Second, assuming you have more than 100 shares – and therefore more than a one-lot options trade – you don’t have to trade the entire position the same way. In fact, for most investors who are unsure whether to hang on to a big winner or sell and take the profits, the most sensible answer is  to sell a portion of the position and keep the rest.

In addition to simply being logical financial discipline, selling something around half of an appreciated position often has the psychological side effect of making a trader more objective about future decisions.

Simply put, when you have a big winner, it can sometimes make you less of a trader and more of a cheerleader. You might want the stock to double or be up some certain percentage or you might fear the risk of selling out and seeing the shares continue to rip higher, knowing you left a lot of opportunity on the table.

When you sell half, your expectations become much more manageable. Are you rooting for the stock to rally because you still have a long position? Of course.

Will you feel smart if the stock falls, because you had the foresight to grab some easy profits at the top? Probably.

Now that you have removed some of the emotional component – because now you’re actually a winner either way – you can stop “rooting” for anything and begin making rational decisions going forward about the current prospects for the stock and whether it belongs in your portfolio.

If you’re sitting on an investment that has done well for you and you still love the stock, by all means keep it. If you’re even a bit unsure however, selling part of the position is probably a good idea. No one ever went broke selling half – and you might be surprised how good it feels.


Want to apply this winning option strategy and others to your trading? Then be sure to check out our Zacks Options Trader service.


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