Concentrated Asset Risk Management Strategies

Individuals with a considerable amount to protect typically do not put themselves at risk by allowing their lives, health, and property to remain uninsured. Yet surprisingly investors are often unaware of or ignore the need for insuring their concentrated stock holdings.

We offer “dynamic” concentrated asset strategies that serve to provide a “better way to own stocks.” With Equity Risk Management, our goal is to protect your holdings and generate income while participating in their upside.

Our Risk Management Approach

While holding a substantial portion of assets in a single stock without interruption may have resulted in significant accumulation of wealth it is prudent to explore strategies that protect value and enhance investment flexibility. Such concentration exposes you to the risk of lack of diversification, sole reliance on positive price movements to generate returns, and up to 100% loss of principal. Selling a portion of a concentrated equity position to purchase broader investments may hold negative consequences such as adverse tax implications, the inability to realize the full upside potential of the equity, and diminished voting rights. Our risk management approaches are intended to allow investors to participate in the upside potential of their concentrated asset holdings while attempting to reduce the negative consequences.

Our “dynamic” collaring strategies aim to generate a stream of income from the shares and protect their value through the strategic use of options. The income generated through the sale of covered calls can help generate positive returns and pay for put protection. In effect, we have taken traditional concentrated asset strategies and made them dynamic in nature.

In a traditional equity collar, the investor can protect against downside risk by purchasing a put option, which by itself may be too expensive. To defray the cost of the put, or “floor,” a call option is sold, thereby becoming a “cap” on the upside. Setting a floor and cap establishes a collar on the value of the underlying holding. This hedges the risk for a specified amount of time. Such collars are fixed, generally have a long-term structure and are viewed by some investors as price prohibitive. Our “Dynamic Collars” provide a flexible alternative that does not intend to cap the upside potential and increases the probability of positive returns.

Concentrated Stock/Options Positioning

“If not managed properly, concentrated assets may prove to be a mixed blessing.”

Jason Weissman

Senior Director

“How do I get more value out of my stock and/or options holdings?”

Put your holdings to use:

Using Puts and calls dynamically enables passive holdings to be protected and monetized.

Cash extraction:

There is the opportunity to extract cash without selling shares.

Generates income:

Calls can help ensure maximum utilization of assets through income generation, and enhanced returns. Increases likelihood of positive returns.

Mitigate Risk:

Levels of protection may be set to your needs while performance risk tied to share price direction is reduced. Our Dynamic Collars prepare you today for the unforeseen tomorrow.

The Dynamic Collar – How it Works

We take the best of the traditional equity collar and add a dynamic element—which allows us to be responsive to share price, market moves, current events and the changing needs of our clients. Our dynamic collar provides a flexible alternative that does not intend to cap the upside potential and attempts to increase the probability of positive returns.

Step 1 – Put Protection

Purchase put protection generally extending only six months providing a floor for shares at levels set to client needs. This duration allows us to adjust the “floor” as needed. If the stock price moves higher, put protection can be adjusted higher (“rolled up”) to protect the appreciated value of the underlying security.

Step 2 – Strategic Call Writing

Covered calls—or the “cap”—usually sold on a monthly or short-term basis. The time-frame is adjusted based on individual client needs and the assessment of specific option values. The cash generated from selling calls may be used to offset the cost of put protection and compliment the overall performance of the security by providing yield.

Step 3 – Cycle of Dynamic Adjustments

Calls and puts are adjusted dynamically. At times, to capitalize on the underlying market volatility, calls may be bought back and resold prior to their expiration. This cycle may continue based on the changing share price in an attempt to lock in profits, collect additional premium, allow room for the stock to move higher, or limit losses. If the underlying share price exceeds the option strike price and the investor does not wish to sell the underlying shares, the call contract may be closed out, eliminating a sale. There is the potential for a loss the call must be repurchased for more money than its original selling price. If shares are called away prior to the expiration date, new shares can be purchased to fulfill the delivery obligations of the contract, thus avoiding a constructive sale.

Step 4 – Strategic Use of Income

Deploy income generated by the underlying position. This income may be used to create a diversified portfolio, cash extraction/liquidity, and or to repay debt incurred from the exercise and hold of stock options. We will work with you to ensure the possibilities are made clear, in light of your goals and plans.

* If your portfolio is highly concentrated, email us or call us at 212-320-2040 for a full discussion of how best to protect it.

* Please see Glossary for an explanation of certain terms contained herein.

While principal invested is subject to loss, risk is reduced by premiums collected on covered options and limited by protection levels. Covered calls may result in limiting upside appreciation. It is possible the cost of put protection may never be offset by the sale of calls. Options are not suitable for all investors.

Back to Equity Risk Management

“If not managed properly, concentrated assets may prove to be a mixed blessing.”

Jason Weissman

Senior Director