Portfolio Management Strategies for Affluent Investors, Family Offices, and Trust Companies
With the tremendous growth in the number of high-net-worth investors in the United States
over the past couple decades, various investment tools have been utilized to help these
investors meet their financial goals -- goals that often include preservation and growth of
capital, and deferral and minimization of taxes. This website shows some of the many ways in
which a very flexible investment tool -- listed options -- can help high-net-worth investors
pursue their financial goals.
Resources (including Discussions of Tax Topics)
White Paper for High-net-worth Investors (Acrobat format) * (published in 2001)
Taxes and Investing: A Guide for the Individual Investor *
IRS Publication 550 on Investment Income and Expenses (see, e.g., pages 45-62 for information on capital gains and losses) *
* Three of the above publications have discussions of tax issues. Please be aware of the fact that tax laws and regulations, regulations can change and are subject to varying interpretations. Investors should consult with tax advisors for up-to-date tax advice applying to their particular investments.
Protective Strategy - Collar on Stock
The protective collar strategy provides downside protection through the use of put options,
and finances the purchase of the puts through the sale of call options.
By simultaneously purchasing put options and selling call options with differing strike
prices and the same expiration (the strike of the put is lower than that of the call), a collar
often can be established for little or no premium cost, or can be established as a credit.
The put options place a "safety net" under the stock by protecting value in a declining market,
"insurance" against the risk of a decline. The call sales generate income to offset the cost of
the purchase of the protective puts. Depending on the call strike price and the level of the
underlying stock at expiration, assignment of the short call position may have the effect of
limiting gains. In other words, collars are transactions where downside insurance is financed
with upside potential.
As a hypothetical example, assume it is August and an investor has a large portion of his
portfolio invested in 100,000 shares of XYZ stock, which rose in price from 60 to 96 per share
so far this calendar year. The investor would like to limit big losses and lock in at least
$20 worth of gains on the stock through December, while still retaining the potential to
participate in more upside moves of the stock.
If the investor wanted downside protection below 80 for approximately 6 months, he could
purchase December expiration 80-strike puts for $4 per share and sell December expiration
120-strike calls for $4 ?. In this case, the investor would net $0.50 per share to establish
the collar (not including commissions).
Since each option contract covers 100 shares, the investor needs to buy 1,000 put options
and sell 1,000 call options to hedge the entire 100,000 shares with a collar. Therefore,
this collar can be initially established for a net credit of $50,000 ($0.50 per share x 100,000
shares). Alternately, $450,000 received from the sale of the calls
(1,000 call contracts x $4.50 premium x 100 shares) less $400,000 paid for the purchase of puts
(1,000 put options x $4.00 premium x 100 shares).
The Stock Rises - The portfolio participates in any upside move up to the strike price of the calls. Above the 120 price level, losses from the short call position offset gains in the underlying stock. The puts expire worthless.
The Stock Falls - The portfolio participates in any upside move up to the strike price of the calls. Above the 120 price level, losses from the short call position offset gains in the underlying stock. The puts expire worthless.
The Stock Price Remains Stable - If the stock price remains between the put strike of 80 and the call strike of 120, the options expire. In this case, the total value of the stock position is increased by the $50,000 net premium received.
Index Collar Strategy
Equity Collar Strategy
CBOE S&P 500 95-100 Collar Index (CLL)