I DON'T THINK THE

True, like most Americans, I've been shelling out well over $2 a gallon at the pump, and the bill for filling the tank has made me cringe. But I haven't really changed my driving habits. And my oil stocks have provided some compensation, rising nicely this year as much of the market has been stagnant.

But the news from the lawn guy came as a wake-up call: It's time to start paring down those energy holdings.

When I first recommended the oil sector, I warned that this day would come. Oil isn't really a growth sector. The world's oil supply is finite, and it's getting harder and harder to find replacements. I suppose another North Sea find could come along at some point, but geologists don't seem to think it's likely. So there are really only two things to propel oil stocks: supply and demand.

This past year, the stars have aligned perfectly for oil producers, driving prices to record highs. On the supply side, the Iraq War and ensuing terrorism, especially in Saudi Arabia, have fanned fears that supply could be sharply curtailed. On the demand side, the world-wide economic recovery, and the boom in emerging markets like China and India, powered an increase. The result has been an oil price hovering around a once-unthinkable $40 a barrel.

So what's the problem, at least for oil stock investors? Oil stocks are cyclical, and the cycle can't really get much better than it has been during the past few months. Even if oil prices were to stay where they are for another year or two and for all I know they might investors think oil stocks are cyclical, so they're not going to wait around.

Already, most stocks in the sector have pulled back from their recent highs, though not by much. The iShares Dow Jones US Energy Sector Index Fund is a good proxy for the sector. The exchange-traded fund hit an all-time high of $55 in late April, and this week it's trading at about $54. So far this year, it has gained more than 9%, and over the past year it's up 23%, which is pretty impressive. Its biggest holdings are Exxon Mobil, ChevronTexaco and Schlumberger, the oil-services giant.

I don't expect these stocks to plunge, so I'm not sure there's any need to rush for the exits, but it's still time to start thinking about paring back. One way to do this would be to sell some calls, raising some cash now, and locking in a price to sell later. The deeper in the money the calls you sell, the more likely you'll actually have to sell the stock.

Take ChevronTexaco. You can't expect to find any huge premiums in these low-beta stocks, but I was pleasantly surprised to see the December 90 calls selling for nearly $5, and the December 80 calls fetching $11.30. (CVX itself was trading at just over $90.) That means you can lock in a price of $95 if you sell the December 90 calls today and the stock stays above $90 through the December expiration date. Selling the December 80 calls obviously gives you more downside protection.

I'm not a big fan of stop-loss orders for reasons I've discussed in the past, but that would be another way to lock in gains. Or you could just make sure you keep an eye on this market sector, and set a point where you'll step in and sell. Just make sure you follow through.

Nortel, which I recommended some weeks ago, is still hovering at less than $4 a share and is still a bargain, in my opinion.) Or just put them into an index fund for the time being.

Then, when oil prices finally go down, you can enjoy your savings at the pump, and not have to worry that your oil stocks are dropping.