How to protect a long term option gain?

[starrynighter]

Suppose stock XYZ is at $200 and I buy one (deep OTM) put option for $4 at strike $100 with 24 months to expiry.

18 months later, XYZ is at $80 so the put is worth $20 + time value.

I believe XYZ will travel further south.

How do I safeguard most of my profit and keep riding the winner?


Possible solution:

Buy a call at the money ($80) with +4 week expiry, for, say $4 [the specifics of this Call depend on volatility etc, but lets go with these numbers to show how it works...]

Now, if XYZ goes up to $84 or higher, the call recovers any lost put gains that had accrued at $84.
… so I cap my loss in this 4 week period at $4, but gain the opportunity to see XYZ sink and the put gain value.

I could repeat this in the following 4 weeks – to be assessed.

To me, this is a “ratchet with small slip”, but I believe the term “ratchet” has been used elsewhere.

Please critique this or suggest better strategies.

 

[tommcginnis]

How do I safeguard most of my profit and keep riding the winner?

There will be no free "reward" without concomitant "risk." Of half-a-dozen easy plays that come to mind, each one parries risk off for the price of reduced reward; each one is best thought of as a new, independent trade. Thus, your best trade going forward depends on what you would do with this underlying *right*now* as a new trade. If you thought that buying a put was a good trade, but wanted to prevent a loss, you could
1) put a SL on the put trade, or
2) buy a call below your put strike, or
3) buy a vertical call spread around your put strike (reducing the cash outlay of choice 2, but also {"Guess what!"} reducing potential reward.