I use options as a tool to manage risk. When I'm profitable and want to let the profit run, I lock-in gains. When a stock have sharp moves and the market is very volatile I use options to cap risk and aim for good R:R. Let's see in the CEG example how this could be done to manage your risk.
Constellation Energy (CEG) provides power, natural gas, renewable energy and energy management products and services in the U.S. CEG stock was up nicely in 2024 (92%) mostly due to its nuclear power division and the SMR (small nuclear reactors) theme that was strong in the past year, because of the data centers future needs. Blackrock's 2025 thematic outlook is for 700B$ investment in data centers and energy infrastructure for this year, which is huge.
On Jan 2nd CEG was up 4%, and was breaking out of a DTL (down trend line) on big volume, as the company announced it won 1B$ contract from the US administration. It was still under the 50d ma but there seemed to be support at the 219$ level. So, I decided to swing trade it and bought 100 shares at 234.6 with a 219$ stop (risk 1560$).
The stock ended the day strong so decided to hold it and try to swing.
In the following days, the stock kept on moving higher and reached 266$ on Jan 6th (2R). At that point I decided to lock-in gains and bought 1 ATM P265 for 4.6$ (460$). That way I guaranteed a profit of 2580 (or 1.65R). I paid 460$ for the put with a target of 280$ for the stock, meaning risking 460 to gain 1400$ (280-266). That seemed reasonable to me at that time. I also don't want a winning trade to become a loser, so I usually either sell or trim some at 2R or lock-in gains with options.
On Jan 8th after the stock selloff to 253, I wanted to go long again (as my put hedged the stock and I didn't have any exposure below 265). I sold the 265P for 12$ (1200$) and booked a 740$ from the hedge, and also bought the 250P for 2.2$ (220$) just in case it will continue to go down.
Later in day, CEG stock crashed suddenly -9% to 233. The move was very sharp and volatile. It turned out that CEG was about to buy Acquire (another private company) for an estimated 30B and the market got spooked.
Because I again didn't had any exposure (as the P250 hedged me completely) I decided to use some of my profits and to buy 3 C240 for an average of 2.43$ (730$). Although the stock was going down sharply, my risk was capped for the premium, and the volatile action could go both ways.
Later as it reversed up and reached 240.5 I sold my 100 shares, locking-in another 600$.
So my profit was 740 from the p265 and 590 from the stock = 1330 (0.85R).
I also had 3C240 and 1P250 that cost together 950$ and will pay 1000$ if it expires exactly at 240 , and more under 240 or above 240. (above 250 its like having 300 shares).
On Jan 10th, the expiration day, the futures were pointing down -1% after a strong employment report. CEG was up 13% in the pre-market. The company announced the deal of acquiring Calpine and raised its annual forecast. The market seemed to like the deal a lot. I waited for the open and sold 100 shares at 285$ to take profit. When the market gives you a gift, you must take it. So, I sold a 1/3 right at the open (at 285 it's like selling the C240 that cost 240$ for 4500$).
10 minutes later I bought 2 P290 for 5$ each (1000$ total) to lock-in the remaining 2C at 285$ and also give them a chance to keep on running.
3 hours before expiration I bought 2P300 for 1$ (200$ total) to lock-in more gains.
And near the end of the day, sold 200 shares for 305$ (like selling the calls for 6500$ each.
Total profit from the 3C+1P was (65*300 -950-1000-200) 17350.
And from the total trade (17,350+1330) 18,680$. That's a 12R winner.
CEG stock looks like a legit BO, however the market is weak lately and BO are prone to fail, so decided to take profits and move on to the next trade. I also have exposure in VST and GEV so don't want too much exposure in the Energy sector.
Conclusion: Using options can help you manage risk better. If I only swing traded CEG without options, the best scenario would have been to sell or trim some at 266$ and take 1 or 2 Rs. I could also give back all my profits. And for sure I wouldn't get long when CEG crashed on the merger rumors. Using options allowed me to managed my risk in the trade properly, and to let the market the opportunity to give me a big R multiplier winner.
Cheers.
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