Here are 3 ways to play defense with options

With the S&P 500 now testing the key resistance level at the upper end of its trading range, those who have captured gains during this insane run should consider taking some profits off the table.

Given both the speed and magnitude of the recent rally — and the significant resistance looming overhead — prudence dictates adopting a more-defensive posture right now.

The fear that naturally arises when taking profits is potentially missing out on further upside.?Fortunately, traders have a variety of techniques available for striking the right balance between locking-in returns while remaining open to additional gains.

Such techniques also soothe the emotional drama that arises when faced with an all-or-nothing decision.? Should I stay all-in or go all-out?

All-or-nothing is always a hard pill to swallow. Its large, coarse, spiky outer shell makes it hurt on the way down. So, consider these alternatives in the options market that allow you to have your cake and eat it, too.

1. Covered Cal! l — Given the plethora of expiration months and strike prices available to trade, you can identify a call option that offers the right balance between risk and reward to sell against the stocks you already own.

Here, you may want to become familiar with option delta, which tells you the percentage chance of your option finishing where you want it to. (You can find delta through your brokerage platform or at financial sites that give you the option to see detailed options chains.)

To use delta with covered calls, here’s a rule of thumb. Want more protection??Sell a higher delta call.? Want more profit potential?? Sell a lower delta call.

2. Stock Replacement Strategy — Unload your stock and replace it with a call option or call spread.? Such an adjustment drastically reduces the capital allocated to the position, thereby reducing the risk.? It also allows the accumulation of additional profits and, unlike the stock itself, you can trade in and out of the call or call spread to maximize your returns.

3. Collar — Adding a collar to the mix consists of simultaneously selling a call and buying a put around your long shares. This strategy morphs the unlimited risk/reward nature of a long stock position to a more-palatable limited risk/reward.

A number of other adjustments could certainly be made. The options market provides virtually limitless choices that enable you to structure positions to your preference.