Rolling Up My Calls

The bull stands strong, and the market's resiliency in the face of Japan's overnight ugliness is once again impressive. I'm doing some trading today.

I've sold my News Corp. (NWS - commentary - Cramer's Take) position for about a 15% gain. I'm using those proceeds to buy what I wish I'd bought the first time: some slightly out-of-the-money calls dated several months into the future. Very little premium on the calls, and I'm reducing my downside risk.

I'm also selling yet more Microsoft (MSFT - commentary - Cramer's Take) calls, these ones being January '07 $25s, for which I paid about a buck back in May. I'm taking the $5-plus proceeds and will look to buy some longer-dated, slightly out-of-the-money calls there, too.

Very little premium on those calls, and by selling the $25 calls, I'm taking off the potential for losing all those gains if Microsoft's common stock were to fall back below $25. By using a fifth of the capital to open up the same upside exposure if Microsoft were to continue running, I'm reducing risk and keeping close to the same upside positioning. It's a defensive move and a way to take some profits off the table. It's also called "rolling up my calls."

Finally, I am looking to sell some of my Cisco (CSCO - commentary - Cramer's Take) calls to do some rolling up there, too. No rush just now, though.

At the time of publication, the firm in which Willard is a partner was net long News Corp., Microsoft and Cisco, although positions can change at any time and without notice.

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Cody Willard is the manager of a hedge fund and a contributor to the Financial Times and VON Magazine. He is also a regular guest on CNBC's Kudlow & Company and an adjunct professor at Seton Hall.

He earned a bachelor's degree in economics at the University of New Mexico. Willard appreciates your feedback -- click here to send him an email.