What If You Don't Already Own Amazon or Priceline.com?
First of all, be sure you want to own these companies. Amazon sells at dizzying PE ratios because the investment community sees it as a play on skyrocketing revenues, like the extra revenues Amazon should experience from its new service through the U.S. Postal Service that offers delivery of what was purchased on Sundays. Jeff Bezos and his team have an impressive track record of lucrative innovations and this one is no exception.
Priceline.com is selling for around 22 times forward earnings or a 1-year forward PE ratio of 22. That sounds very expensive compared to Microsoft (MSFT) but if you compare how the stock of each has performed you clearly see investors prefer Priceline.
You can buy a mini-call option on both Amazon and Priceline and at the same time sell a mini-put option at the same strike price. Make sure the expiration dates on these mini option contracts go out far enough into the future so you have a better chance of seeing the call go up in price while the put you sold hopefully drops in value.
Some investors call this strategy a "synthetic long", and it's designed to let an investor or trader participate in the upside potential without committing a big chunk of your investment money. You can set up a trailing stop alert for Amazon and Priceline to help you stay focused that the underlying stock price is heading the right direction.
The discipline of a trailing stop is akin to the discipline of position sizing. Both are risk management strategies that are designed to prevent catastrophic losses while giving investors a fighting chance of experiencing some big winners.
Ask your brokerage firm about using mini option contracts for synthetic longs or,with mini put options, as a strategy that protects you if the stock or long-term call you own suddenly plummets in price.
Even if you just want to buy some shares of the high-priced stocks which includes Google (GOOG) use a trailing stop monitoring and alert system that lets you know at the end of each trading day how close you are to the trailing stop loss percentage or dollar amount you've chosen for each holding.
Remember, a trailing stop is a huge help in making sure you lose just a little bit when you're wrong about the direction of an investment you're buying. Yet most of us face two big problems as traders and investors:
- When to cut our losses short...
- How far to let our winners soar before taking our profits.
Disclosure: At the time of the publication of this article the author was long GOOG and MSFT.
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