Lehman Brothers is advising clients to follow a stock replacement strategy that utilizes call options to replace some or all stock positions, which have rebounded from the effects of the slowing U.S. economy and the impact of the Sept. 11 attacks. Investors who think the U.S. equity market may crash before year-end should opt for this trade, according to, Paul Lieberman, v.p. of equity derivatives and quantitative research in New York. He explained it locks in the stock gain by selling some of the stock and maintains upside exposure with the rest. Being a defensive strategy the loss in the call option is limited to the premium paid, he added.
In an example strategy, an investor who purchased 100,000 IBM shares before Sept. 11 at USD93.32 would sell half of the shares to lock in profit. The shares were trading at USD114.43 on Thursday. Lieberman also suggests clients purchase at-the-money calls, which have a delta of 0.5, on 50,000 shares. The maturity of the calls can vary with the goals of the client, but will typically be between January and March.
