Jane Joseph, a manager at Computer Science, Inc. (CSI), received 10,000 shares of company stock as part of her compensation package. The stock currently sells at $40 a share. She would like to defer selling the stock until the next tax year. In January, however, she will need to sell all of her holdings to provide for a down payment on a new house. Joseph is worried about the price risk involved in holding on to the shares. At current prices, she would receive $400,000 for the stock. If the value of her stock holdings falls below $350,000, her ability to come up with the necessary down payment would be jeopardized. On the other hand, if the stock value rises to $450,000, she would be able to maintain a small cash reserve even after making the down payment. Joseph considers three investment strategies:

a. Strategy A is to write January call options on the CSI shares with strike price $45. These calls are currently selling for $3 each.

b. Strategy B is to buy January put options on CSI with strike price $35. These options also sell for $3 each.

c. Strategy C is to establish a zero-cost collar by writing the January calls and buying the January puts.

Evaluate each of these strategies with respect to Joseph’s investment goals. What are the advantages and disadvantages of each? Which would you recommend? P-639