Below are articles outlining what the major investment firms suggest for their clients and how the partners use collars for their own portfolios. 

I.     Stock-Hedging Lets Bankers Skirt Efforts to Overhaul Pay

By Eric Dash; Griffin J. Palmer contributed reporting.  Published: New York Times, February 6, 2011

“……..many executives have found a way, by using complex investment transactions, to limit the downside on their holdings, or even profit, as other shareholders are suffering.  More than a quarter of Goldman Sachs’s partners, a highly influential group of around 475 top executives, used these hedging strategies from July 2007 through November 2010, according to a New York Times analysis of regulatory filings. The arrangements were intended to protect their personal portfolios when the firm’s stock was highly volatile, especially at the height of the crisis. In some cases, executives saved millions of dollars by using these tactics. One prominent Goldman investment banker avoided more than $7 million in losses over a four-month period.

Hedging – a commonly used tactic for years, especially during times of weakness or volatility – makes sense for executives at public companies who have amassed a large concentration of stock. They allow employees to limit losses, raise cash, or diversify their portfolios without selling the underlying holdings. Any individual investor can use hedging tactics for the same reasons, but few do because the transactions are complicated and make more sense for those who own a large amount of stock.

”Goldman Sachs shares represent the largest component of the wealth for many of our employees,” said Michael Duvally, a Goldman spokesman. ”Hedging or outright sales, when allowed, can be a prudent part of a portfolio diversification strategy.”

By maintaining their stake, executives can continue to vote on shareholder proposals that influence the direction of the business. Hedging also helps investors to avoid the tax obligations associated with offloading stock.  There are various types of hedging strategies, many of which involve stock options. In one transaction, known as a covered call, a long-term shareholder can make income off a stock for a few months, provided it stays below a certain level. But if the price soars, the investor will not benefit from most of the rise.  In another hedge, known as a collar, an investor uses options to lock in the potential profits and losses on a stock. Although the move caps the potential upside, it also limits the risk.

The filings illustrate how routinely Goldman’s executives used the strategies. From July 2007 through November 2010, at least 135 partners used options to protect themselves from stock drops or to profit if shares held steady.

Shareholders over the same period endured roller coaster volatility. Goldman shares peaked at $248 in fall 2007 before dropping to $52 a year later after Lehman Brothers failed.

For Goldman partners, the most popular hedging strategy was covered calls. Take Christopher Cole, chairman of Goldman’s investment bank and a member of the management committee. From 2007 to 2009, he made at least 11 such transactions, earning more than $675,000, according to the filings.

Byron D. Trott, a Goldman partner best known as Warren E. Buffett’s investment banker, fared much better on one deal. In October 2008, Mr. Trott hedged 175,000 shares, using a collar to limit his profit potential but insulate him should the stock plummet over the next four months. The transactions, set up months before, were executed just a few weeks after Mr. Buffett agreed to hand over $5 billion to Goldman in exchange for a potentially lucrative stake – a transaction Goldman hailed as a ”strong validation of our client franchise and future prospects.” Mr. Trott, who did not return calls for comment, helped facilitate the investment. Goldman’s stock, which was trading around $128 that October, dropped to $73 by January. With the hedge, Mr. Trott lost roughly $2 million on the stake, less than a quarter of what he would have otherwise.”

II.  Single Stock Diversification Strategies    Wilmington Trust

“Many directors and officers, especially those of fast-growing companies, find themselves in a quandary these days. If they own millions of shares in those companies, their net worth can be substantial. So what’s the downside?

A portfolio that is top-heavy in one security poses tremendous downside risk. How, then, can an executive diversify his or her portfolio in the most effective, tax efficient manner?   Here is a brief look at some single-stock diversification strategies to help an investor achieve three goals – to hedge, monetize, and diversify out of a concentrated equity position while deferring capital gains tax.


Collars are types of hedging strategies used to limit the price risk of a stock and permit the investor to participate in further appreciation, up to a specific price. A collar also allows an investor to monetize – that is, borrow against – a concentrated equity position.

One well-known type of collar is the zero-premium collar, or zero-cost collar. With this approach, “put options” provide protection from a price decline below a specified price, and “call options” provide appreciation potential, up to a specified price. A “put” is a contract that gives an investor the right, but not the obligation, to sell a certain number of shares at a specified price until a certain date. A “call” gives its holder the right, but not the obligation, to buy a specific number of shares of stock at a predetermined price, until a certain date.

For example, if a stock is trading at $100, an investor could simultaneously buy a put option at $90 and sell a call option at $125. The call strike price is set so that the premium received for the call option will match and, therefore, cover, the cost of the premium that the investor must pay to purchase the put option; hence the term “zero-premium collar.” The strike price is the price at which the owner of a call can buy the underlying stock or the owner of a put can sell the underlying stock.

In this scenario, if the collar were to expire, say, after three years, the investor would have a floor price of $90, while enjoying a potential price rise to $125 during a 36-month period.

Another kind of collar is the “income-producing collar.” It is similar to the zero-premium collar, except that it generates income to defray the cost of borrowing against the value of the stock. With an income-producing collar, the net premium received from the sale of a call option after covering the cost of the put option is available for payment to the investor.”

III.  Hedging and  Option  Strategies  William Blair.

“…..Having a significant portion of your wealth tied up in the stock of a single company can create liquidity constraints. If the price of the stock experiences a sharp decline and then a need for cash arises soon thereafter, you may be forced to sell the stock at an unattractive price, or even a loss.

Immediate Sale

Selling most or all of the stock from the concentrated position immediately and investing the proceeds in a variety of other stocks, bonds, and alternative investments is perhaps the simplest and most straight-forward risk-management.  If the price of the stock were to fall in the future, (especially dramatically) you may enjoy a greater after-tax return from selling the stock now—even if you pay more in taxes.

Although a sale would immediately protect you from the downside risk of the stock, in many situations, however, this is not a workable solution. If you are subject to certain SEC restrictions, an immediate. For example, if you are a company insider, you are prohibited from selling your stock during blackout periods throughout the year. Even if you are not subject to such restrictions, an immediate sale may not be the best solution. If one or more personal  challenges exists—whether emotional attachment, fear of  missing future appreciation, or a desire to invest in what you know—you likely will not be comfortable with an immediate sale of your concentrated position. External barriers such as public perception and market impact also can make an immediate sale undesirable. But perhaps the biggest potential barrier to an immediate sale is the tax consequences.

Low Basis

Furthermore, assuming your basis in the stock is low, an immediate sale may generate significant capital gains tax liability. Incurring such a liability will impact your investable assets and runs counter to the traditional tax planning strategy of deferring taxes to the extent possible.

Comparison of Hedging Strategies   

Protective puts:   Purchasing put options on the  concentrated position to create a price floor at the put’s strike price. Downside protection while  allowing full participation in stock’s future appreciation.  However, Purchase of puts is an out-of-pocket expense

Covered calls:  Selling (or “writing”) call options on the concentrated position Full participation in appreciation up to the strike price; proceeds from options sale can be used to enhance returns or diversification. No protection from price decline.  However, no participation in appreciation above strike price; proceeds from options sale create taxable income

Zero-premium collars:  Simultaneously selling calls and buying puts to create a price ceiling and downside protection. No up-front premium; full participation in appreciation up to call strike price; 100% downside protection below put strike price. However, there is no participation in appreciation above the selected call strike price. The upside call strike price can initially be structured to allow as much appreciation as you want. But too high a cap might result in too little premium garnered from the call sale to offset the put cost for a zero up front cost of protection.”