Stocks like Twilio (TWLO) and Canopy Growth (CGC) have led the market higher to start 2019. But in the last two weeks, these stocks and many other leading growth stocks have begun to weaken a touch. Do you want to know how to protect your stock gains while continuing to hold those two stocks for upside? Buy protective puts.
Fellow Cabot analyst Mike Cintolo, chief analyst of Cabot Growth Investor, recently broke down Twilio’s just-released earnings.
“Fundamentally, TWLO continues to have a rare growth story, which was reaffirmed by the quarterly report this week. Revenue growth accelerated again (to 77%), though that was partly thanks to the acquisition of Sendgrid; active customers grew to more than 64,000 (up 31% from a year ago); and same-customer revenue growth was a whopping 48%, again picking up a bit from the prior quarter.”
(To learn more about Mike’s Cabot Growth Investor advisory, click here.)
Clearly the future is bright for TWLO given the impressive earnings report. However, if you are concerned that the stock has risen too far too fast, and want to add some protection you could use a protective put options trading strategy.
Here at Cabot Options Trader our tactical trades are on fire. From February 1 through April 1 we’ve registered 7 winning trades in a row with an average profit per trade of 35%. We’d like to share our success with you by giving you a chance to test-drive our trading advisory at our lowest rate.
Here at Cabot Options Trader our tactical trades are on fire.
From February 1 through April 1 we’ve registered 7 winning trades in a row with an average profit per trade of 35%.
We’d like to share our success with you by giving you a chance to test-drive our trading advisory at our lowest rate.For more details, click here.
How to Protect Your Stock Gains with Protective Puts
A protective put is used when a trader is bullish on a stock he already owns, but wary of the stock’s short-term future. It is used as a means to protect unrealized gains, while giving the trader continued upside potential.
TWLO Protective Puts
Theoretically, if you own 100 shares of Twilio (TWLO), and the stock is trading at 118, this is how I would implement the strategy.
First, I would continue to hold my 100 shares.
Second, I would Buy to Open one TWLO July 115 Put for $13
The total cash outlay for the put is actually $1,300 because each put represents 100 shares. That $1,300 is the insurance policy you took out on your stock position, and will protect your 100 shares if TWLO were to take a much bigger fall. Here’s a graph of the stock position combined with the put purchased:
In essence, you have bought an insurance policy that will protect you for five months from a big fall. If TWLO falls, your losses are stopped at 115, which is the strike price of the put that you bought. At 115 or below, you have the right, but not obligation, to exercise your put, which would take you out of your TWLO stock position. You would likely exercise this right to sell your stock at 115 if TWLO had fallen precipitously lower.
However, to the upside, your potential gains are unlimited!
CGC Protective Puts
Next let’s apply this strategy to Canopy Growth (CGC), which had been on a monster run, but has recently been under pressure.
Again, assuming you own 100 shares of CGC, which is trading at 43, and want to execute a protective puts strategy, you could Buy to Open one CGC July 42.5 Put for $7.
When you buy this put for $7, your total cash outlay is actually $700 because each put represents 100 shares. That $700 is the insurance you took out on your stock position and will protect your 100 shares if CGC were to take a much bigger fall.
Similar to the TWLO example above, your upside is still unlimited. But now you have bought an insurance policy that will protect you for several months. If CGC falls, your losses are stopped at 42.5, which is the strike price of the put that you bought. At 42.5 or below, you have the right, but not obligation, to exercise your put, which would take you out of your CGC stock position. You would likely exercise your right to sell your stock at 42.5 if it had fallen precipitously lower.
However, to the upside, your gains are again unlimited!
What makes these such compelling trades is that they protect the stock holding for several months against general market drops, Trade War concerns or Washington, D.C. risk, etc. And because the puts don’t expire for several months, they also protect your holding against Twilio and Canopy’s next earnings announcements.
While I don’t love paying for insurance/puts, given the recent shakiness in TWLO and CGC, this strategy is a great way to protect my stock holding while continuing to give me upside potential.
To learn more about how to trade options and how to protect your profits using calls and puts, consider getting a trial subscription to Cabot Options Trader.
Jacob Mintz is a professional options trader and Chief Analyst of Cabot Options Trader. He uses calls, puts and covered calls to guide investors to quick profits while always controlling risk. Beginners and experts alike can gain from following Jacob’s advice.Learn More