The US market will be closed on Monday for Memorial Day and investors sold off heavily last Friday in order to secure some profits ahead of the uncertain long weekend.

Weekends, especially long weekends, introduce a great due of uncertainty and suspense as anything could happen over the weekend resulting in a pre-market sell-off which most investors can do nothing about. We have all woken up on a Monday morning to see the index futures off by a cliff drop, haven't we? This is why a lot of investors sell profitable positions on Friday in order to lock in profits

Are selling stocks really the only way to lock in profits should a stock's price drops? For stock only traders, Yes, but definitely a resounding NO for options traders. For options traders, a better choice to protect a stock that is expected to continue moving upwards is to put on what is known in the options trading community as the Protective Put.

Let's take one of last Friday's in-play stocks, Mobile Telesys Ojsc Ads (MBT), as an example.

Russian stocks have been rallying most of the week with MBT in the lead. MBT closed higher by 9.99% on Friday, ending the week up 9.50% versus the week before. When we look at the minute chart for MBT last Friday, we see the same late day profit taking pattern ahead of the long weekend. Obviously, investors are taking the easy way out by selling out of this stock ahead of the long weekend instead of risking a nasty surprise on Tuesday. This is a good move if the intention is to reallocate the fund into another stock on Tuesday but if the intention is to buy the stock again if the stock moves favorably on Tuesday, then additional commissions and a bid-ask spread loss would have to be incurred.

Don't let long weekends stop you from owning your favorite stock! Use the Protective Put options trading strategy to protect your stocks from catastrophic losses!

What the Protective Put strategy means is simply to buy as many slightly out of the money put options as the amount of shares you have. Put options rise in value as the underlying stock drops, thereby acting as an insurance on your stock!

Assuming you bought 100 shares of MBT at $32.50 and have made $4.73 per share in profit so far. You are bullish on the stock, wish to keep it, but want to hedge against the long weekend risk. What you can do is, invest $1.70 out of your $4.73 profit so far and buy 1 contract of MBT's June $35 Put Options. The put options gain in value dollar for dollar if MBT drops below the strike price of $35! Yes, the Protective Put makes sure that the value of your position would not drop below $35! You would have incurred $1.70 in expenses but that's the expense you pay for almost a month's insurance. Plus, you might have lost more than $1.70 per share if you sold the stock on Friday only to buy it back when it gap opens on Tuesday. So, using the protective put allows you to protect your stock, save money if you intend to eventually buy the stock back and it is valid all the way till the put options expires on the third Friday of June. The Protective Put protects your stock for not one, but all 3 weekends till their expiration.

Certainly you would be able to sleep much better knowing that your stocks are protected, right? In fact, the protective put is practised by professional fund managers worldwide as an important risk management strategy. Please read my tutorial at for more information on Protective Puts.

Now that you know how to hedge your stock against nasty drops using the Protective Put options trading strategy, lets take a look back at the DRYS bull call spread position that we covered last weekend. Since covering it last week, DRYS has dropped by 3.07% this week and the Sep7.5/11 Bull Call Spread has dropped from $0.90 to $0.55. Even though the stock dropped just 3.07% the options position dropped about 39%. That is why I mentioned last week that we only use money we intend to lose fully in a bull call spread like this. Leverage cuts both ways. Out of the money bull call spreads are speculative positions that will lose its full value if the underlying does not rally above the strike price of the long call options, which is $7.50 in our case. The good thing about trading options this way is that you know for sure that the most you can lose is an amount you have already pre-determined and that greatly reduces the stress of trading. So far, DRYS has been riding atop a $6.00 support level and we still have 3 months to go for DRYS to go to $11 in accordance to our playbook.

Disclaimer : Neither I nor Masters 'O' Equity or and any of the staff, own any shares in DRYS nor hold the above mentioned options trading position. The above article uses closing prices on 22 May 2009. Actual prices on Monday's opening may be different. This article is for educational purposes only and should not be taken as an investment recommendation. Options trading is not suitable for everyone and advice should be sought from your local financial adviser.