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Preserve Your Clients' American Dream

Justin Lent | March 14

Concentrated stock positions are often as unique as the people who own them. Entrepreneurs, multi-generational family businesses, successful executives, even individuals who amassed their positions over years of steady investing - each one comes with a fascinating back story. I'm reminded of my good friend's grandfather who, in the late 1950s, took his family, Clark Griswold style, on a road trip around the United States. Sure they hit all the American classics (huge ball of yarn anyone?) but they also visited many of the largest shareholders in Bank of America at the time. Along with great memories, my friend’s grandfather also collected a large number of Bank of America stock certificates - the proceeds of which put all of his grandchildren through college.

Simple Position, Complex Relationship

While simple on a balance sheet, concentrated stock positions bring logistical and psychological complexity. There are a number of things an investor with concentrated stock could do:

  • Sell the stock: Not usually feasible because of low tax basis or emotional attachment to the position
  • Continue to hold position: Exposure to high volatility and considerable downside
  • Exchange Funds: Decreases liquidity while not providing any tax benefit, potential for lower dividends, exposure to additional securities, high correlation to markets

Each of those possibilities has tough trade offs. By incorporating an options overlay into the mix, the opportunity for the investor increases considerably.

Preserving Single Stock With StratiFi

StratiFi offers the full gamut of single stock protection mechanisms using options. At the most basic level we have a standard collar, which we execute for a number of clients. However, along with the standard collar we also have a proprietary approach: Enhanced Concentrated Stock Preservation. Depending on your client’s risk profile and sophistication either or both of the strategies could be relevant. Below, we contrast our standard collar strategy with our proprietary approach:

Providing Downside Protection:

Both a standard collar and the Enhanced Concentrated Stock Protection use the same mechanism to protect the position from a decrease in price. Both strategies use puts which locks in a sell price for your stock so if the stock goes below the predetermined price of the put you maintain the ability to sell the stock at that predetermined price.

Realizing Upside:

Standard Collar:

A standard collar sells calls to buy the puts. By selling calls, you are establishing a short term maximum value of profits you can earn. While you are sacrificing upside, this strategy is the industry standard executed by a large portion of investors looking to protect concentrated stock positions.
This image visually displays the workings of a collar strategy.

Enhanced Concentrated Stock Preservation:

With the Enhanced Concentrated Stock Protection, we don’t sell calls to fund the puts. Instead, we implement a proprietary alpha strategy that generates consistent returns to buy the puts. Although our proprietary alpha strategy is a proven approach to generate returns, this strategy is much more sophisticated and might not be right for every client. (To learn more about this strategy please reach out.)

Below is a quick summary chart that shows the comparisons:

Standard Collar Protection Enhanced Concentrated Stock Preservation
Downside: Preservation Objective Preservation Objective
Upside: Capped Not Capped
Best Used For: More conservative clients looking for established solutions More sophisticated clients looking to enhance returns

StratiFi Works To Offer the Best of Both Worlds

At StratiFi, it is our goal to create tools that help investors manage risk and make the most of their positions - no matter how unique. That’s what led to the diversity of our single stock solutions. So, no matter how you approach it, your client's stock is both protected and able to maintain stock upside, allowing your client to look back fondly on how they acquired their stock, not worry about the effect its concentration may have on their future.

Every investment involves some degree of risk. Please read full StratiFi disclosures before thinking about investing: StratiFi Full Disclosures

To learn more about the truth behind asset correlations and volatility, click here for our complimentary eBook "The Five Myths that Put Portfolios at Risk: Revealing the truth and improving investment outcomes using options."