Nothing Free About Free LIC Options

Steve Johnson

Starting about 12 years ago, a crop of new wave LICs came with a so-called ‘free’ LIC options. In addition to every share you bought for $1.00, the manager generously gave you an option over an additional share, at no additional cost. Sometime down the track, usually up to three years later, if the stock was trading above $1.00, you’d be able to buy a bunch more shares for just $1.00, locking in an instant capital gain. Milton Friedman busted—free lunches all round. Unsurprisingly, investors ate it up. For a while. But then a funny thing happened. The shares of all these new LICs soon traded at sharp discounts to underlying NAV. Perplexing? No. It happened for a very valid reason. That reason, repeat after me: There is no such thing as a free LIC option. The simple reason why is that anything you gain on the option, you lose on the stock. View Gareth Brown's post (VIEW LINK) on the mechanics of LIC options and why the only winner is the manager.


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Rash

Very insightful commentary on LICs and I wish more Advisors understood this aspect when advising clients generally on LICs

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