Wizards of wealth creation like Warren Buffett counsel that the key to stock market success is to buy into a great business, sit back and let it make you rich. It's sound advice, but even people as patient as Buffett sell stocks from time to time, as Berkshire Hathaway did in 2024, trimming stakes in big gainers like Apple and Bank of America, and completely ditching other stocks like Snowflake.
If you've been holding Nvidia or other "magnificent seven" tech stocks for the past couple years, you might feel a bit like Buffett yourself lately. The Nasdaq 100 has almost doubled since this bull market began two years ago, and got a bump higher in the wake of Donald Trump's election victory. Many investors are sitting on big gains, pondering whether to stay the course or sell to lock in profits. The question is not a binary one, because you can employ several strategies that allow you to do both.
The simplest technique to continue owning a stock with some downside protection is to put in a stop-loss order specifying a particular price or magnitude of decline that automatically turns it into a sell order. However, there are risks to this simple technique.
"If you have a $100 stock with a $90 stop and it opens tomorrow at $75, you're selling at $75, not $90," says Justin Zacks, vice president at online trading platform Moomoo Technologies. "Another problem with stop losses is during volatile markets, a stop loss gets hit when the stock is down on a very bad day--but the next day it goes right back up and you get stopped out at the bottom."
Another, more expensive way to establish a floor for your stock holdings is to purchase put options, which permit the owner to sell a security at the strike price anytime until expiration. For that insurance, you pay a premium, which increases along with stock volatility, time until expiration and how close the strike price is to the current stock price. Owning puts will bail you out of a stock drop by letting you sell at the strike price, or by selling the puts at a profit and staying in the stock.
Buying put options provides p...
If you've been holding Nvidia or other "magnificent seven" tech stocks for the past couple years, you might feel a bit like Buffett yourself lately. The Nasdaq 100 has almost doubled since this bull market began two years ago, and got a bump higher in the wake of Donald Trump's election victory. Many investors are sitting on big gains, pondering whether to stay the course or sell to lock in profits. The question is not a binary one, because you can employ several strategies that allow you to do both.
The simplest technique to continue owning a stock with some downside protection is to put in a stop-loss order specifying a particular price or magnitude of decline that automatically turns it into a sell order. However, there are risks to this simple technique.
"If you have a $100 stock with a $90 stop and it opens tomorrow at $75, you're selling at $75, not $90," says Justin Zacks, vice president at online trading platform Moomoo Technologies. "Another problem with stop losses is during volatile markets, a stop loss gets hit when the stock is down on a very bad day--but the next day it goes right back up and you get stopped out at the bottom."
Another, more expensive way to establish a floor for your stock holdings is to purchase put options, which permit the owner to sell a security at the strike price anytime until expiration. For that insurance, you pay a premium, which increases along with stock volatility, time until expiration and how close the strike price is to the current stock price. Owning puts will bail you out of a stock drop by letting you sell at the strike price, or by selling the puts at a profit and staying in the stock.
Buying put options provides p...
You're reading a preview of
Forbes (Digital) - 1 Issue, December 2024/January 2025