Read Option

I am starting to seriously consider using some form of options to protect some of my gains in NUS and GTAT.  I have never bought or sold an option in my life, though the HIG and BAC warrants are forms of options and I have received some options at my job.

In talking to some helpful people of Eds Talking Stock blog, it appears there are two ways to go.  The first is to buy puts, which is a form of insurance. I pay some money and essentially limit my downside. For NUS I could pay 9.70 and get be guaranteed to be able to sell my shares for at least $110 in March of 2014. As the stock is currently at $115, that would cap my downside to $100.30, or $15.  The advantage of the put is my upside is unlimited.

The other approach would be a covered call.  Here I could sell $100 calls for $21.  By doing this, I am capping my upside. If the stock ends at $100 or higher, I get the $100 plus the $21 I made at the time of sale.  So I am locking in 5% upside from here through March, unless NUS drops below $100. NUS could drop as low as $80, before I would be worse off under the covered call approach versus the put I listed above.

So the covered call approach is better than the put approach for all stock prices between $80 and $130. The put approach is better than the covered call if the stock price goes above $130 or below $80.  Holding NUS (with no options) is better than covered call if price goes above $121.

I guess the covered call seems the most attractive to me. That being said, part of me says not to use the options. The entire reason I have a diversified portfolio of 30+ stocks is so I am not overweight. While I worry about a GTAT fall, in reality the AAPL deal (in my mind) inoculates them to some extent. Unless they materially change their view on where they will be in 2015 or 2016, the next couple quarters should not move the needle much (of course they are still exposed to general market risk).  NUS probably has the bigger risk as if the FTC announces some sort of investigation into MLMs, they could get a major haircut.  While that would suck, NUS is only 2.8% of my entire portfolio.

And recall, when NUS was trading around $80 I was saying I would lock in the profit then and there if I could.  I would have missed $35 upside.  Hmm, what to do?

A quick update on my portfolios, the first two days have been sub par this week. I am down 1.3% while the market is down 80 basis points.

My new MFI tranche is down 0.6%, which is on par with the Russell 3000.  I did make a little tracking portfolio of my "rejects", the MFI stocks I considered but did not buy. They are up a snappy 1.8%, so thus far I picked the wrong stocks (not that two days makes a year, but I am just having some fun here). AWRE is up 7.4%, PFMT is up 10.3% and RFIL is  up 14.5%.