Does Your Stock Position Have a Customized Protection Shield?Sheaff Briefs Editor
Wealth created by holding a single stock over time is a fairly common finding. In fact, as the Sheaff Brock investment team has been traveling to lecture at Financial Planning Association meetings around the country, advisors have continually mentioned the challenge they face helping clients who own a concentrated position in a single stock.
Concentrated positions that comprise more than a quarter to a third of your entire portfolio holdings often happen as part of a benefits package for a senior executive, but may also be the result of an inheritance. Regardless of how the concentration happened, the result is a disproportionate amount of risk in one concentrated position. That concentration may expose you and your heirs to undue portfolio risk.
Any financial planning client with a stock position comprising one-quarter to a third of his/her entire portfolio holdings may want to ease out of that position while protecting the value over several years. Too often, this proves too time- and technology-intensive a task for even the most sophisticated of practitioners.
Sheaff Brock believes the customization needed to help those clients with concentrated positions may be achieved using a collared option strategy. A dedicated team specifically tailors an individualized “collared option” strategy for each client with a concentrated position. That customized strategy is devised considering:
- your specific concentrated holding
- the industry of which your stock is a part
- your specific time frame
- your risk tolerances
- your estate plan
How does it work? A “collar” is structured around the stock shares by:
- selling a call option to generate an option premium
- using that money to purchase a put option (See chart below)
Your financial advisor understands the need for unique planning solutions for you and other clients with concentrated positions. Now, those customized solutions are being made available with your advisor continuing to oversee and monitor your overall financial and investment plan.