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
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?
• 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.