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Too much of a good thing?

Akhil Lodha | December 7

Even well-balanced portfolios can include concentrated stock positions. There are plenty of reasons to maintain these positions—including being personally attached to the stock or wanting to avoid tax penalties in reducing the position. Or it may be a restricted stock, and there is no other choice.

But there can also be unintended consequences of holding concentrated positions, when stock-specific risk or volatility increases significantly. That’s when a concentrated position becomes too much of a good thing.

An options overlay can shrink the risk of a concentrated position—without requiring liquidation of the underlying shares.

Manage the downside without forfeiting the upside

Selling shares may be the only way to fully eliminate the concentration risk, but that’s not always the best choice. The right solution is often to keep the shares and reduce the risk of large losses when the stock drops dramatically. Options can provide this safety net, without giving away all of the upside participation.

An option overlay strategy can control for the stock-specific risk only, or the increased market risk, or both. StratiFi makes it easier to target the precise outcome, with a technology platform that pinpoints and efficiently manages the appropriate overlay positioning.

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."