Options  |  APR 2003

Split Synthetic Stock Positions by Roger Ison, Ph.D.

Split Synthetic Stock Positions by Roger Ison, Ph.D. Use this flexible but little-known strategy to buy stock inexpensively, deploy cash more effectively, and diversify your portfolio. Suppose that a stock you follow, Abcd Inc. [ABCD], has just taken a substantial price hit. It’s really beaten down. Its sector has had some news that made investors nervous, and now there are some negative analyst comments about the company itself. But you know this company. You watch it, you understand its business, and in your judgment, these shares are now an excellent deal. On its merits, ABCD is a stock you’d like to own. This feels like an opportunity, but what is the best way to act on it? YOUR CHOICES • Buy the stock? You could buy the stock outright. But you might have to ride out a further decline, and it’s hard to predict when the stock will recover. Your money will be tied up for an uncertain period if you buy now. Yet this is a sound company, and the recovery might be sharp and substantial when it comes. If you don’t invest now, you could miss a big move up. It’s a dilemma. • Use options? You could write some puts striking below the current stock price. That way, you pocket some money immediately. If the stock declines further, it will be put to you at an even lower price, which would be a good thing, since you’ve already determined that this is a stock you’d like to own.

by Roger Ison, Ph.D.