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This post concludes the thread that we began with We Now Have the Problem Everyone Wants, about whether it’s time to start taking profits or otherwise focus on protecting our recent mining stock gains.

There are lots of ways to do this, including the following.

Small Sales

“Taking profits” sounds, to some investors, like dumping entire appreciated positions. But it’s not necessary — or even wise — to completely abandon a winning stock. Instead, just shave off a few shares. Brokers allow sales of single shares, so it’s possible to lower exposure to a given stock by as little or as much as you want.

One mechanical rule is to designate a dollar amount for a given stock position, and periodically sell enough to return it to the target. But any combination of small sales fits the definition of protecting profits.

High-Price Offers

Consider the low-ball bid, in which you tell your broker to buy shares if they fall to a target price. Now reverse the logic by placing a good-until-canceled sell order at a higher price, so if a given stock spikes, you sell it automatically. This eliminates the “should I pull the trigger now?” angst while capturing a recent gain.

Covered Calls

If a stock is rising, sell call options (in 100-share contracts) that give someone else the right to “call” those shares away from you at a given “strike” price. You get some cash, which you keep if the stock doesn’t reach the strike price and the option expires worthless.

If the stock exceeds the strike price before the call’s expiration date, you sell the stock automatically. The risk is that you’re only partially protected against a decline in the stock price that dwarfs the option proceeds.

Put Options

A put option gives its owner the right to “put” shares (in 100-share increments) into someone else’s account at a pre-determined price. If the stock price falls, the put option becomes more valuable, which partially insulates the holder against the resulting stock position loss. So think of it as temporary insurance.

Puts can also be used to protect against broader declines; instead of buying a put on a specific company’s stock, buy puts on ETFs like GDX or indexes like the Nasdaq (QQQ) or the S&P 500 (SPY).

Stop Loss Orders

A stop loss order is placed at a price that’s lower than the current price, and will only be executed if the price falls to the order level. This stops declines from continuing into “round trip” territory.

Meanwhile, a “trailing” stop loss follows the market price by a predetermined percentage or dollar amount, known as the "trailing amount" or "trailing step". This allows the investor to participate in gains while still protecting against sudden losses.

Stressful, but Necessary

The prospect of selling a stock that’s made a lot of money is psychologically similar to breaking up with a friend. It’s hard on a variety of levels. But it comes with the “successful investor” territory.

If we’re going to rack up massive gains, we have to, at some point, convert those gains into houses, boats, or college tuition for the grandkids. Doing this correctly might be the most important step in the wealth creation process.

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