Hedging Low-Cost-Basis Stock – An Overview

Investors with low-cost-basis stock face many decisions. First, they should determine the investment goals for their particular security. When a stock achieves its investment expectations, it is thought that the investor has to either sell the stock and pay a capital gains tax or hold the stock and watch it rise or fall. There are other choices available to take a few chips off the table without triggering tax or giving up ownership.

As the attached articles and decision tree show, investors do have many other choices. Specifically, they can create options-based hedges on their stock and, if they wish, borrow against the (now hedged) stock. There are different ways to hedge stock and different ways to monetize. Low-cost stockholders need to learn about the risks and rewards of each approach so that they can choose strategies that are appropriate for their situations.

Having chosen a risk/reward profile, low-cost-basis stockholders need to consider certain features of their particular securities and how they were acquired. With so many factors and choices to consider, investors with low-cost-basis securities can feel overwhelmed.

In the attached Low-Cost-Basis Stock Decision Tree, we have mapped out the most important investment factors and choices in summary format. This interactive flow chart sets forth the various low-cost stock management techniques and summarizes the significant consequences that follow from each approach.

For users who prefer a textual summary, we have also attached a series of short articles on hedging strategies. 

We hope that the program and articles will give investors an overview of their alternatives for managing low-basis securities.


                                    
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Options involve risk and are not suitable for all investors.  Before engaging in an options transaction, investors must receive the booklet “Characteristics and Risks of Standardized Options.”

 

 

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