Wando: There are several ways of covering yourself using options. I tend to use simple strategies. For instance, to cover my short position, I will sell September 120 or 121 puts. Using Friday's prices (which are now overstated due to the 3-day weekend) I might receive the following:
Sell Sep 99 120 Put Receive $1.0625
or Sell Sep 99 121 Put Receive $1.1875
Because I received cash for the sale of the put (Sep 120), I have raised my short position by $1.0625. Because I am short at $119.50, I received the credit making my new short position now at $120.5625. At risk is the following:
If QQQ tanks to less than $120, I must purchase QQQ between now and Sep 17. My profit resulting from my short position is limited to the difference of $120.5625 and $120.
If QQQ remains above $120 between now and Sep 17, I keep the proceeds from the sale of the put and remain in my short position. I now have the ability to sell the Oct 120 put at $3.125, again raising my short position to $123.6875.
Before I enter into an options position, I will watch closely the MSFT, INTC, WCOM, DELL, & CSCO as they represent 39% of the 100 Index.
Wando, this strategy locks you in until options X day. While it limits your losses, it also limits your gains. If you believe that we will see a retracement in the next few weeks, you might want to wait this out. Let me know if I can help, Mike
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