Common Strategies for Protecting and Managing Concentrated Stock

Concentrated stock can cause complex financial challenges. Here are a few strategies on how Capital CS group can help you manage your Concentrated Stock.

Strategy 1: Exchange Fund

An exchange fund accepts a large concentrated stock position in exchange for units of a diversified portfolio. This is a great strategy because it diversifies your portfolio and defers capital gains taxes.

Strategy 2: Covered Call

https://www.investopedia.com/articles/optioninvestor/08/covered-call.asp

What Is a Covered Call?

A covered call is a risk management and an options strategy that involves holding a long position in the underlying asset (e.g., stock) and selling (writing) a call option on the underlying asset. The strategy is usually employed by investors who believe that the underlying asset will experience only minor price fluctuations.

Key Points:

A covered call is a popular options strategy used to generate income for investors who think stock prices are unlikely to rise much further in the near-term.
A covered call is constructed by holding a long position in a stock and then selling (writing) call options on that same asset, representing the same size as the underlying long position.
A covered call will limit the investor’s potential upside profit and will also not offer much protection if the price of the stock drops.

Strategy 3: Protective Put

https://www.investopedia.com/terms/p/protective-put.asp

What Is a Protective Put?

A protective put is a risk-management strategy using options contracts that investors employ to guard against the loss of owning a stock or asset. The hedging strategy involves an investor buying a put option for a fee, called a premium.

Puts by themselves are a bearish strategy where the trader believes the price of the asset will decline in the future. However, a protective put is typically used when an investor is still bullish on a stock but wishes to hedge against potential losses and uncertainty.

Protective puts may be placed on stocks, currencies, commodities, and indexes and give some protection to the downside. A protective put acts as an insurance policy by providing downside protection in the event the price of the asset declines.

Key Points:

A protective put is a risk-management strategy using options contracts that investors employ to guard against a loss in a stock or other asset.
For the cost of the premium, protective puts act as an insurance policy by providing downside protection from an asset’s price declines.
Protective puts offer unlimited potential for gains since the put buyer also owns shares of the underlying asset.
When a protective put covers the entire long position of the underlying, it is called a married put.

Strategy 4: Zero Cost Collar

https://www.investopedia.com/terms/z/zerocostcollar.asp

What is a Zero Cost Collar?

A zero cost collar is a form of options strategy to protect a trader’s losses by purchasing call and put options that cancel each other out. The downside of this strategy is that profits are capped, if the underlying asset’s price increases. A zero cost collar strategy involves the outlay of money on one half of the strategy offsetting the cost incurred by the other half. It is a protective options strategy that is implemented after a long position in a stock that has experienced substantial gains. The investor buys a protective put and sells a covered call. Other names for this strategy include zero cost options, equity risk reversals, and hedge wrappers.

Key Points:

A zero cost collar strategy is used to hedge against volatility in an underlying asset’s prices through the purchase of call and put options that place a cap and floor on profits and losses for the derivative.
It may not always be successful because premiums or prices of different types of options do not always match

Strategy 5: Variable Prepaid Forward

https://www.investopedia.com/terms/v/variable-prepaid-forward-contracts.asp

What is a Variable Prepaid Forward?

A variable prepaid forward contract is a strategy used by stockholders to cash in some or all their shares while deferring the taxes owed on the capital gains. The sale agreement is not immediately finalized but the stockholder collects the money.

This strategy is typically used by investors who own a large number of shares in a single company and want to raise cash while postponing taxes.

Key Points:

This strategy allows a large shareholder to cash in while postponing taxes due on capital gains.
The sale is not finalized. That is an advantage for holders of stock options with a later exercise date.
The strategy is controversial and tends to draw IRS scrutiny.

Next Step

The Capital CS Group will work with you to create a personalized Concentrated Stock strategy. To get professional advice on our Concentrated Stock, contact us today.