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Even with the

S&P 500

heading into the homestretch of 2002 at a full gallop -- the index is up some 20% since Oct. 8 -- it's still down 18% for the year. Unless the index can tack on another 22% in the next three weeks, we will have officially booked the third-consecutive losing year.

But before you tear your brokerage statements into New Year's confetti, take a close look at your holdings. There may be something to cheer about after all.

We ran a simple screen looking for stocks that have gained 40% or more over the past 12 months, have a current price above $30 a share, a market capitalization of more than $500 million and an average daily trading volume above 200,000 shares. And, of course, options must be available. As it turns out, quite a few names paid off quite handsomely.

Among them:


, up 121%;



, up 112%; and

Dreyer's Grand Ice Cream


, up 95%. For a complete list of what the screen produced,

click here.

TheStreet Recommends

If you own some of the names on the list, you might feel like it's 1999 all over again, but there is one difference -- this time you (hopefully) know there's no shame in securing profits.

Take the Money, Don't Tell the IRS ... Yet

We've all read how executives sometimes "enter into a series of complex forward sale agreements" designed to "hedge a pre-existing (that's redundant, right?) equity stake" or something of the sort. The truth is, it's not very complex, and any shareholder of record can do it. It goes by several names, such as a risk conversion, a fence, a combination, or, my preference, a collar.

"It" is a very straightforward three-piece position -- long stock, short calls and long puts. The benefits are twofold. You can lock in profits without actually selling any shares, and thereby defer capital gains taxes.

The options in this setup can have different strike prices, but they must have the same expiration date. In this case, we'll use January because our primary goal is to maintain the long stock position through the end of 2002.

What It Looks Like

Here's an example. Suppose we own 100 shares of

Forest Laboratories


and have enjoyed a nice 55% gain over the past 12 months.

On Dec. 3, with the shares trading at $108.50, you could buy a January 105 put for $3.80 and sell a January 110 call at $4.50 for a net credit of $70 (each option controls 100 shares, so 70 cents x 100 = $70). Remember, the purchase of the put gives you the right to the stock should it fall below $105; the short call obligates you to sell the shares should they rise above $110. Essentially, the sale of the call is financing the purchase of the put.

The stock is now collared between $110.70 (the call strike plus net credit) and $105.70 (the put strike plus net credit). At the current price of $108.50, the maximum gain is $220, or 2.1%, and the maximum loss is $280, or 2.6%.

The table above shows an average sale price of $108.03. The loss of 47 cents, or 0.04%, from the current price of $108.50 represents the risk/reward ratio of this particular collar in which the maximum gain is $220, while the maximum loss is $280 per 100 shares.

The table below spells out the profit and loss profile relative to a move in the underlying stock price from $108.50 a share.

As the names suggest, this strategy is designed to lock in a price range in which one would be willing to sell shares. In the example above, a sale of Forest Labs at $110 will be triggered by the short calls, and a sale no lower than $105 is protected by the long put.

In neither case will the actual sale of the underlying stock occur before the end of the year. By identifying stocks that have recorded substantial gains this year and using a collar to lock in gains, one can defer taxes, making 2002 a bit easier to swallow.

If, on the Jan. 18 expiration day, Forest Labs is trading between $105 and $110, both the put and call will expire worthless. You will continue to be long the stock, and you'll have collected $70 in net premium.

Steven Smith writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Steve Smith.