There is no need to lighten up when valuations get towards the high end of their range.
But if one wanted to, I note that it might not be such a bad time to write some covered calls.
i.e., write a call option to add to a current long position, which is conditionally selling some stock.
e.g., January 2023 $340 calls are trading at $29.
Various outcomes:
(1)
The stock remains this high or higher till year end.
Your stock gets called away at a net exit price of $369/B = $553500 per share.
That’s 1.629 times currently known book per share.
Intrinsic value per share probably won’t rise more than 5% by then.
So, not such a bad outcome. If you were thinking of lightening up anyway, that’s a pretty good valuation level.
(2)
The stock price pulls back and stays there.
You keep the $29 premium.
About 8.6% profit in 309 days, which is about 10.1%/year rate annualized linearly.
And that’s money you would not otherwise have had, also not so bad.
(3)
The stock falls for a while at some point this year, but rebounds and ends up high by next January.
This might be the most common situation—prices fluctuate.
You pay attention during any price plunge, and close the covered calls early for a profit, then ride the stock price back up again.
It’s quite common to make (say) 2/3 or 3/4 of the maximum possible profit in under half the time.
This is a smaller profit in absolute terms, but excellent as an annualized rate.
And keeps you off the street doing other trading mischief.
(4)
Even more obscure.
It’s getting towards the end of the term.
The stock price is strong; higher than $340. You didn’t close it early for a profit.
The call you’ve written, seen in isolation, is in a pretty big mark-to-market loss position.
(you’ve made an offsetting and larger profit on the stock that’s paired with it, but the call itself is running at a loss)
Often you’ll see this opportunity:
Late in the year, close the January 2023 call for a loss, and write a June 2023 call (6 months later) at a higher strike that is now at the money.
This will increase the net exit price of the shares you “sold” now by adding the call,
and frequently you can do this in a way that the transaction also raises cash the day you do it.
Higher breakeven, more cash–not so bad.
This works as well as it does in part because at-the-money options have higher time value than in-the-money options.
You sold one pretty much at the money, but when you’re closing it it’s now in the money.
Plus, of course, the evaporation of time value works in your favour.
This is a fancy way of improving the outcome of situation (1)&(2) above: a “redo” with a higher exit price or more cash, though it takes longer.
Jim