With the S&P 500 Index staging its strongest two day rally since February 1 many momentum names have surged to new highs. Among the consumer stocks Chipotle (NYSE: CMG), Fossil (NASDAQ: FOSL), Buffalo Wild Wings (NASDAQ: BWLD), and Lululemon (NASDAQ: LULU) have all experienced impressive advances to new 52-week highs.

Investors owning these stocks face a current dilemma of sorts. On the one hand the market seems to have found its footing and the bulls are on the verge of reclaiming the pivotal 1300 level in the S&P 500 Index. On the other hand, many of these momentum stocks have already risen dramatically over the past few weeks. LULU alone is up 37% since June 7 and quite extended from any levels of potential support.

So what’s a trader to do when the market looks healthy and has room to run, yet their individual stock is due for a breather? Let’s take a look at LULU.

One answer is to take partial profits or add options to the mix to reduce one’s exposure. Let’s explore three potential adjustments.

1.  Sell half your position. This effectively locks in half your gains and takes advantage of the recent run while leaving you open to rack up additional profits if the stock continues ripping higher. I’ve always found taking partial profits a nice compromise between the fear of missing out on further upside and the fear of giving back any unrealized profits if the stock drops.

2.  Use a Stock Replacement Strategy. Consider selling your stock position and replacing it with a long call option or call spread. For example, if a trader purchased 100 shares of LULU around the $100 level they could sell the position to lock in roughly a $1300 gain and then buy a LULU Sep 105 Call option for around $1,475. In doing so they’ve effectively reduced the capital allocated to the position from $11,300 to $1,475.

3.  Sell a Covered Call or buy a Protective Put. With LULU trading around $113, shareholders willing to limit their profit potential to acquire a small amount of downside protection may consider selling the LULU Aug 115 Covered Call for $7. Traders averse to the idea of limiting their upside may consider buying the LULU Aug 110 Put for $6.60 as an alternative.

Source:  MachTrader

At the time of this writing Tyler Craig had no positions on LULU.