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Chapter 4. Managing Profits and Losses > Managing Profits with Options - Pg. 47

Managing Profits and Losses 47 Short-term indicators can be very distracting. Momentary volatility in issues you own, especially when price spikes are part of marketwide volatility, can be very distracting. Without gaining inde- pendent confirmation of apparent changes in trends, it is easy to make mistakes. For example, you may decide to sell stock to avoid further price declines when it is not necessary, or you may buy additional shares when prices surge, only to realize later that a correction was virtually certain. Reacting to short-term indicators and trends is human nature, but it can adversely affect the value of your conservative portfolio. The ongoing conflict between short-term market trends and your long-term mindset is efficiently managed with options. Used in the proper context--for managing price volatility and not as a primary and speculative change in policy--options help smooth out the price volatility that characterizes the market while protecting profits. Ask yourself these questions: 1. 2. 3. How often are paper profits one-time opportunities? With high-quality stocks, do you still consider long-term growth potential likely? Have you sold stocks prematurely, fearing the loss of profits? Deciding How to Establish Your Policies Most investors can relate to all of these questions because they have a familiar ring. If you have observed trends over time, you know that the price gyrations occurring this week and this month have a short-term aspect and a long-term aspect. You are keenly aware of what occurs from one day to the next, and you see daily reactions to political and business news, to earnings reports, to rumors of interest rate hikes, and to an unending number of other reasons for prices to rise or fall. But in the long-term context, short-term price changes and the daily reasons for daily price volatility really have nothing to do with long-term value. Conservative investing emphasizes fundamental corporate strength--competitive position, excellence of management, diversification, healthy capi-