There is a Wall Street maxim that has been repeatedly proven true: “Bulls make money. Bears make money. Pigs get slaughtered”. Essentially, one can make money on the upside or the downside, but getting too greedy can cloud one’s judgment and end up losing any gains that could have been realized by locking in a profit and closing the position. It often happens at casinos, when someone at the roulette wheel or the craps table runs a lucky streak. Some take their winnings, but others stay too long, and wind up losing it all.

Bull, Bear, or Pig?

However, there are ways that one can exercise some control and overcome compulsions that can lead to bad decisions. A Reddit poster found himself in a similar situation concerning a position he accumulated of Nvidia (NASDAQ: NVDA)  stock. Buying it when it was still trading under $10, his total $34,000 investment has continued to soar, and, including the stock split, is worth $850,000. The poster attributes his fortune to ignoring the continued warnings to sell at previous price drops before surging ahead again. However, he acknowledges that holding on too long to Tesla (NASDAQ: TSLA) forced him to give back a sizable profit if he sold at the top, as originally intended. 

He is faced with the following dilemma, and has requested guidance:

• He wants to start selling once his position is worth $1 million but is worried that he might repeat his Tesla experience. 
• His gut tells him Nvidia is a bubble and he is inclined to sell ⅓ of his position. However, he has no idea of what to transfer the funds to if he makes the sale.
• As a resident of Puerto Rico, he is taking advantage of Act 60, which absolves him of capital gains taxes, which in his case would be on 2,600%.
• If he lets it ride and holds on to the position, 2-5% moves can mean significant amounts of money gained or lost.

Covered Calls to Lock in a Profit on the Upside

While the poster may be justified in his gut feeling, at the time of this writing, NVDA is only 7.5 points shy of its 52-week high and is on a bullish trend. There are some strategies that he can apply to address his questions, and the ones I would suggest include:

• Use an out-of-the-money short-term covered call strategy for 10% of his position at a time. For example, with the stock at $145, he might consider selling the Dec. 27  $152.50 calls at $2.25 each. If the stock closes above that price on 12/27, the underlying stock will cash out at $152.50, which is the top of the NVDA market. 
• If the stock closes under $152.50, the options expire worthless, he collects the extra premium for Christmas money, and can repeat the process at whichever strike price makes sense relative to the stock’s closing price for January. He can also increase the covered call options to encompass up to the 30% position he originally planned to sell. 
• He can still sell the stock if it starts to fall precipitously, since the option premiums for out-of-the-money calls shrink more rapidly the farther they are from the strike price. If concerned that he can’t bring himself to sell it if the price falls, he can enter sell-stop orders that automatically triggers if the stock and options fall to specified prices. 
• If and when he does decide to sell the position, he might want to consider shifting some funds into tax-deferred IRA and/or HSA accounts. As for what to buy with the proceeds, index funds for the overall market, commodities, and international markets offer some diversification for risk mitigation. Additionally, precious metals might also be worth looking into. 

 

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