Many people reading this post are in a similar position.
We all own a lot of shares of a stock that has had a great six-day run. You've seen this story before, and you're sure the stock will drop back, so you're awfully tempted to sell some shares and buy back at a lower price, or to write covered calls or buy puts.
The put buying is straightforward; you pay a certain amount to buy some downside protection for a limited period of time; it's "insurance" that costs money upfront but pays out if the stock falls below the put price. Personally, I find this option too expensive; if I am confident a stock is going to fall, I'll just sell it.
Writing covered calls is my favorite way to play the ups and downs; I write them when I am very confident that a stock is extended, and the premiums are rich. Often I do this too early, and the trade quickly turns against me, but 80% of the time I do this, the call expires worthless. In about half the times it doesn't, I buy the call back at a modest loss. Even when I lose the stock, I usually have the opportunity to buy it back lower later on.
Then there is trading in and out. I have also had fun with this over the years, mostly when I take a disciplined approach. In the crazy Internet days, I used to buy Priceline at $57 and as soon as the broker told me I was filled, I placed an order to sell it at $63. The sell often filled the same day, and when it did, I placed an order to buy back at $58. I think this was a critical part of the success; if you set these targets in your head but don't place Good Till Canceled orders, there's a good chance you'll either not be online when the price target is hit, or you'll not have the discipline to push the button when it is.
All of these strategies have been very useful to have in place the past 5 years, as Celgene went from $75 to $39 to $75 to $41 to $80.
So what I am doing with Celgene right now?
Sitting on my hands and smiling.
This stock is too early in its run to even think of getting cute with call writing or in-and-out trading. Since it began its torrid run a week ago, every dip has been shallow and short, and the stock has traded exceedingly well at the end of almost every day. I think the Street is in the midst of a dramatic re-evaluation of the value of Celgene, and this takes time to be reflected in the stock price; nothing goes straight up. I think the stock will settle around $110. Even that price will only be a way station on the way to the next, much higher plateau.
A year ago, I predicted Celgene would end 2012 at $100 and 2013 at $140; I was off by a few weeks on the first, and probably will be off two weeks on the second, but if you concur with my projection of $140 by a year from now, then how cute do you want to get trading in and out at $110?
What is the likelihood that when the train leaves the station again, you and your "trading shares" will be off the train, taking a nap or buying a pretzel? How can we #$%$ this likelihood?
History is a good guide. How many shares of Celgene did you own at (split-adjusted) 66 cents in 1998, or at $8 in 2005, pre-Revlimid? How many do you own know? How many were thus left behind in the station?
For me, the answer is "a lot." Had I held on to my 1998 position and pulled a Rip Van Winkle and woke up today, I'd have a considerably greater sum than I do now. Similarly, I bought a lot of Apple at $11; while I still have some, and sold some in the $600s, again, if I simply held my original shares, I'd be much better off.
Celgene is now about to make a run similar to what it did starting in 2005, and similar to what Apple did in 2005. It could rise 200% or more in the next five years.
Decide for yourself how diversified you want to be, and if you have a truly gargantuan number of shares, go ahead and trade some in and out and play with options, but make sure that a very substantial number of shares is in your untouchable, "core holdings" and nestled firmly in your pocket for the whole ride.