Michael Shulman

5 Short-Side Investment Rules

    Tweet This

Free Trading Guides

Fifth rule -- Close and/or roll winning positions

Even if a stock continues to slide, I urge you to close a big win and then open another position with more leverage utilizing only your original investment dollars so you can put profits in your pocket.

This is called "rolling" a position, which gives you the opportunity to raise some capital by closing a profitable position and "rolling" the original investment dollars into puts with lower strike prices and/or later expiration dates.

Because options come with an expiration date, you may need more time to ride a stock's slide as far as it can go. It may take a year or two for the bad news to fully play out of a stock, but you may only have nine months with your put-option position.

So, whether you have a winner and need to preserve your profits, or if time's running out and you haven't yet gotten the results you expected, you can always buy more time to let the position play out.

For example, we booked a 106% gain in Martha Stewart Omnimedia but our Alliance research indicates that the fun (for us, not for her!) is just getting started. So, we pocketed our $3.30 gain and put our original $1.60 investment toward puts that would keep us situated on the short side for a few extra months.

Not surprisingly, within just a few days, the new puts went up 137%. Instead of leaving that on the table, we cashed out of those, too, and put on yet another position.

Rolling a position is similar to staying in a long stock for as long as you want to be in it, but with a little more active management and attention. And if just a little more work can yield a lot more profit, I can't think of a better case to make for how you can't afford to NOT be investing on the short side!