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    Investment - Call & Put Option and Short Sale strategies

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    Your client owns a lot of AA stock with a very low cost basis. Your client is worried that the price of AA stock will drop over the next six months, but he doesn't want to sell his AA stock and incur a capital gain. What strategies can he use?

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    Solution Preview

    Your client has three possible strategies to capitalize on the coming down turn without incurring a reportable capital gain on the sale:

    1. He could sell the stock short meaning he can use the value of his stock as collateral with his broker to borrow shares of AA stock. He would sell the borrowed shares immediately and would therefore have a short position in the stock, while still holding his long position. When AA stock drops, he can buy enough shares to close out his short position and effectively return the stock to the broker (or pay off his loan depending on how you view the transaction - both are valid views). What has ...

    Solution Summary

    The solution discusses four possible courses of action for the client with a long term hold in a stock which the client doesn't want to sell. Each option has a full paragraph of explanation including examples and references to the real AA stock options for understanding.