A lot of you have asked me, my stocks have all gone up, how do I lock in some gains? I am concerned about giving back all my profit. But not many of you are asking, how do I reduce my risk? That is equally important. And this is the question I want to answer today.
Not financial advice, but let me walk you through something. When we have had such a huge, strong run so quickly, it is important to go through your portfolio and say, where can I reduce some of my risk, and how can I do it?
Let me use a real example. During the tariff tantrums, a lot of people entered Nvidia. They sold the January 2028 $90 put and took the premium to buy the January 2028 $80 call. Maybe they had a $20 debit. Standard synthetic long.
Here is what is important. That $90 put, whether you are cash secured, whether you are on margin, no matter what the structure of your trade is, that is still a naked short put sitting in your portfolio. If you did not do these as modified synthetic longs and they are just straight sell put, buy call, that is a naked short put. It is easy to forget that it is there because it is so far out of the money. But the risk is still hanging out there.
And this is true of a lot of stocks in your portfolio that are highly profitable, where the short put has been absolutely crushed.
Option A: Buy to Close the Short Put
That short put, to give you an example, is trading right now for about $4. What does that mean? You can go out and buy to close the January 2028 $90 put at a $4 debit. What does that do to your risk? It eliminates the entire right side from the risk graph. Gone. You no longer have a short put. You still have your long call exposure, so yes, if Nvidia heads back down, you could give up your profit. But you do not have to worry about the short put becoming an issue later because you bought it back to close.
If this is in a retirement account, you do not have to worry about this being a taxable event. You buy to close and it is just gone. It frees up margin for you. If you are in a retirement account, this is your first choice, obviously.
Option B: Convert to a Spread
What if it is outside of a retirement account? You originally got a huge credit for that put, and buying it back to close creates a taxable event. Now, the good news is this is a long term gain, but not every single one of the Puts that you sold has been held for longer than a year. NVDA has been more than a year, but MRVL, ALAB, AMD etc... all went on a rampage in the last 90 days. So here is a trick.
On the NVDA example, you could turn your naked short put into a spread. You could buy the Jan 2028 $80 put to open for about $3 in the same expiration. What do you have now? That is a put spread. A vertical credit spread. How much risk do you have right now if Nvidia went all the way down? Just the width of the spread. So now it is only $10.
You converted your naked short put into a vertical put credit spread. You did not create a taxable event in doing that, because you did not buy back your January 2028 $90 put to close. You simply converted it into a spread by purchasing a put with a lower strike price in the same expiration. That helps offset some of the margin.
All clearing firms treat this differently. I would call your clearing firm and say, hey, if I buy a put with the same expiration as my short put, but $10 lower, will this reduce my margin? You just want to make sure this accomplishes it.
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You Do Not Have to Do All or None
Here is the other thing. Remember, these are not all or none strategies. Maybe you bought six Nvidia synthetic longs. You sold six puts, bought six calls. You might say, I am going to hedge half of them, or I am only going to buy back half the puts. You can do whatever you want.
It is easy to say, how do I lock in profits? The other side of the coin is, how do I reduce risk? That is equally important in a portfolio. Go through your portfolio and figure out where you can reduce some of your risk and how you can do it.