This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

How to Cover Your Assets in a Speculative Stock Position

That's the type of hedge I like to make on speculative plays. The premium I collect from writing the calls helps cancel out or offset downside, depending on the extent of it. And, if I get my shares called away, so be it. I will have returned 4% on the trade (buy at $15.89/sell at $16.50) in just over a week's time.

On broad market weakness or something stock-specific, I can buy more YHOO shares to add to what's left of my position, assuming the bulk of it gets called away at options expiration. For the record, I don't think it will.

Now, consider Pandora.

I accumulated shares, settling on a cost basis of $10.19.

Hindsight can have this effect, but I could kick myself for not taking at least some profits in Pandora at or around its Sept. 6 closing high of $12.57.

Thanks to rumors that Apple (AAPL - Get Report) has plans to introduce a competing service, the stock sunk as low as $9.95 on Sept. 7, closing that session at $10.47. It's been a rough ride from there. Pandora has spent time under $9 per share, ending the day Monday at $9.10.

If I sell at $9.10, I record a 10.7% loss on the trade. Not awful, but considering the 20-plus percent gain I let slip away, it's a minor irritant.

Here's what actually happened. I ended up selling some, though not all, of my Pandora position at $9.00 over the weekend. That's because I got assigned on Pandora Oct. $9.00 calls I wrote against the position. I was merely continuing a strategy I have had in place for months -- writing around-the-money calls against 600 shares of Pandora.

A straight stock sale at $9.00 from a cost basis of $10.19 results in an 11.7% loss. In real dollars, that's proceeds of $5,400 from a cost basis of $6,114. Again, not very satisfying. Of course, that's not what I did because that's not how I roll.

It takes some discipline to stick to prudent rules you set for yourself, particularly when dealing with speculative plays. That's because of the huge reward you often calculate in your head on stocks with significant upside.
2 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $94.02 0.00%
P $8.57 0.00%
YHOO $27.97 0.00%
FB $104.07 0.00%
GOOG $683.57 0.00%


Chart of I:DJI
DOW 16,204.97 -211.61 -1.29%
S&P 500 1,880.05 -35.40 -1.85%
NASDAQ 4,363.1440 -146.4150 -3.25%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs