1) Fly to Las Vegas, catch a show, dine at the $6.95 buffet and gamble the rest away. 

2) Apply it to your wide-screen TV or liposuction fund. 

3) Take your wife to the local spa for a Botox treatment and a full day of pampering. Your wife will love you for it, but it will be forgotten in two weeks, and the wrinkles (hers, not yours) will probably reappear anyway. OR, you could 

4) Purchase some insurance on your $59,000 investment. 

The astute options trader will resist the temptation of choices 1-3. He will use the $800 to buy 10 of the July $75.00 puts for about $.70 ($700). This would, in effect, protect you if IBM moves down. Keep in mind that IBM may be only an earnings warning or an accounting irregularity away from $65. The $75 put would have protected you on any IBM transgression below $75 (all the way down to zero) through July option expiration. 

Now, let's look for a way to help finance our "protection." Look at the possibility of selling an out of the money call against your stock shares. The sale of a call (covered by the shares) will usually pay for all, or most of, the insurance put. Look at the chart below. The July $80 call is selling for $.85. In this case you'd actually have an extra $.20 ($200). The $2.81 difference between the $75 put strike price and the $77.81 price of the stock is viewed as the "deductible." 

If You Don't Sell The Call 

The cost of this insurance for the July cycle is roughly $.65 per share per month – IF you don't sell the call. If you truly believe IBM is headed up, the added $.65 cost for your insurance is pretty insignificant. The longer-term investor can lower his cost per month by purchasing puts further out. You could even buy an option out to January 2007 for about $2.65. That would bring your cost of insurance to about $.38/month. If you don't sell the call to finance your insurance, you're not putting a cap on your profit potential. IBM can go to the sky – without any encumbrances. If IBM moves up significantly, you can sell the current protective put and buy another protective put at a higher level – locking in a large percentage of your profits and, once again, have the necessary protection. 

The "collar" limits what could be a catastrophic loss to a tolerable deductible and allows for IBM to appreciate by $2.22 before you're at risk of losing the stock through assignment. You can repeat the process month after month until your stock gets called away – which is a good thing! It means you made money, which, if I'm not mistaken, is the object of this exercise. 

You Gotta' Know When To Fold Em' 

Some people do, however, become attached to their stocks. They carry a grudge. It's simply not healthy – emotionally or financially. They think that if they lose money on a particular stock, they have to make it up in the same stock. When you buy a stock, where does it say "till death do you part?" Remember, it's only a stock. Don't become emotionally involved. If it goes, it goes. Add up your profits, smile and get on with your life. If it goes down, take your loss like a man and move on with your life. 

There are no monogamy laws or divorce penalties in the stock market. You can play the field. There are thousands of other stocks out there. Just make sure you use "protection." Sound vaguely familiar? 

By the same token, if you're bearish, you can construct the same scenario by shorting a stock, selling an out-of-the-money put and buying an out-of-the-money call to protect your short stock position. 

In most cases, you're allowed to sell covered calls in your IRA. Most brokerage firms will allow you to establish "collar" positions by purchasing the protective put in your IRA. If your broker doesn't permit this, you have the WRONG broker. 

Having Your Cake And . . . 

In summation, you can have your cake and eat it too. The "collar" enables you to own a stock, have room for profit, possibly pocket a few dollars, and be protected on the downside. You'll find that having your cake and eating it beats the heck out of the prospects of digesting that government cheese. 

We're not going to cure the stock ownership disease with the "collar," but we can bandage the wound and stop the bleeding – at least temporarily. However, don't be surprised if, before long, the obsessive-compulsive stock-buyer is back out there, unprotected, still trying to catch those falling knives with bare hands. 

Go figure. 

Missed Any Columns? 

Hey, this is good stuff – especially if you're serious about learning options. The Pulitzer people won't likely be knocking at my door soon, but I've taught a lot of people how to conservatively and consistently make money – and they're still making money to this day. I hope you'll become one of them. 

So, if you missed any of my previous columns, click on the following link and, hopefully, they will magically appear. www.tradingacademy.com/newsletters.htm. 

Who Is This Guy? -- 

Mike Parnos has "been there and done that" – plenty! Known as "Online Trading Academy's Options Therapist," Mike has been trading, consulting and teaching option strategies for over 12 years. Both individually, and through his writings, Mike specializes in teaching conservative and non-directional option strategies while providing therapeutic guidance to thousands of individuals, brokers and institutional traders. Over the years, he has learned from his mistakes, and the mistakes of others, and he's here to share his wisdom with you. "Trading is as much psychological as it is skill," says Mike. "Keep an open mind. You never know what might find its way in there."