5. Protecting Profits

The CBS Sunday Morning program mentioned the "Tower of Terror." It's one of many spectacular roller coasters for those seeking such thrills. Just when the coaster reaches dizzying heights it comes crashing down causing screams and panic among riders.

An analogy was made to this week's behavior in the equity markets (especially the NASDAQ). Early in the week saw the indexes sharply decline from all-time highs.

But that's not all . . . the "Tower of Terror" next brings riders straight up (to just below the lofty height previously reached) before once again cascading down in a heartbeat. Since Friday saw the indexes move sharply to the upside . . . could a precipitous decline be close behind?

I wouldn't be surprised. In the current environment, in my view it's wise to shift one's focus from the possibility of earning additional profits to protecting the bulk of what's already been earned.

So for those who believe new highs can be achieved but who don't want to "ride the market down," I recommend selling calls to cover long equity positions, and buying puts with some of the call proceeds. This creates "synthetic short positions."

In the short run they partially hedge unrealized profits, and ensure profits won't be totally lost in the long term.

"Knowledge is power and all traders can benefit by continually bolstering their knowledge base. I hope to contribute in that regard."  Paul Forchione