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Lock In Your Gains And Sell Your Stock Later With A Collar Strategy

By Greg Hutto, CFP®, CFA®      

In our last two articles of the Perceptive Executive Series, we’ve covered a couple of complex structures: the prepaid variable forward sale (PVFS) and charitable remainder trusts (CRT). These articles required some heavy lifting for me to write and likely some concentration (and hopefully not No-Doze) on your part to read. My goal is to keep things simple for this article.

The same assumptions that I had for you as a corporate executive are still in place. You likely have a lot of restricted stock and/or stock options from your employer. You recognize that it’s not prudent to have so much of your wealth in one stock, yet you don’t want to sell it all (or you can’t sell it all right now).  

Basically, you want to be smart about this process of diversifying your wealth. The last two structures that I mentioned previously would require more work on your part and the part of your advisor to implement. Putting on a collar strategy is relatively easy, and assuming that you’re not subject to trading restrictions, then you and your advisor should be able to use this strategy with relative ease.

Why A Collar Strategy? 

A collar strategy involves the use of call and put options to protect the value of one’s stock. Let’s say we have shares of the common stock we covered in our article on prepaid variable forward sales (PVFSs). Read about it here or just follow along with me. 

That stock that we’ll call XYZ was trading around $355 at the time I wrote the article on PVFSs. Owners of that large defense stock might be concerned that a drop in the stock is imminent because the overall market appeared to be toppy (as it does now). If an investor wants to protect the value of his or her shares, then he or she could purchase put options at a price that is fairly close to the current price.  

Let’s say you decide to buy $345 XYZ put options with an expiration date of January 2021. The third Friday of January of 2021 is the 15th, so if someone buys these put options now, then they have the right (but not the obligation) to sell XYZ stock anytime between now and January 15th of 2021 for $345 per share, regardless of how low the shares might drop between now and then.

The problem with buying put options is that they’re expensive. Let’s say you own 3,000 XYZ shares and you want to buy this insurance policy on them that lasts until January of 2021. It will cost you around $28 per share for the right to sell them at a lower price in the future. Here’s the math: 3,000 shares X $28 = $84,000. That’s crazy, you say, I can sell them now on the open market for $355 per share, so why would I pay someone $84k to sell them at a lower price in the future?! But you might want a higher price in the future, or you might be restricted from an outright sale at this time.  

So let’s see if we can sell call options at a price and time that will pay for the cost of the puts. If you go into the derivatives market, you’ll find a $360 call option that sells for around the same price: $28 per share. If you’re willing to obligate yourself to sell your shares of XYZ at $360 between now and January of 2021 and use the money you received to buy $345 January 2021 put options, then you’ve just arranged a collar strategy.  

Wait A Second…

This particular combination is known as a zero-cost collar, in that the sale of the call options is the same as (or more than) the purchase of the put options. You may be wondering, hmm…if the shares are trading around $355 and I’m selling call options at $360, that’s a $5 appreciation, but the price of the puts only allowed me to buy $345 puts—that’s $10 lower. What gives?

First of all, there’s this nasty fact of life called a bid/ask spread. The folks that run the CBOE (Chicago Board of Options Exchange) are no dummies; they make money on the spread, which is the difference between the price to buy (the ask) and the price to sell (the bid). With stocks that receive a lot of action—lots of people wanting to trade options against them—the spread is fairly tight. This big defense stock doesn’t get a lot of action, and as a result, you could park one of their jets between the bid and the ask prices of the calls and puts.  

So let’s say that you’re concerned in the short term about the price of XYZ dropping, but you believe it has great long-term potential. Could you get a better price for the call option if you were willing to sell more time?

I’m so tired of asking these leading questions…of course you could! Let’s take a look at the option chain for January 2022 calls. The sale of a $400 XYZ January 2022 call would bring around $28, which is the ballpark number we’re looking for. But now you’re obligated to sell this stock at $400 all the way until January of 2022, which is a long time from now. It could go to $500 per share by then!

If XYZ stock appreciates well above $400 per share in early 2021, then you’re likely going to have some seller’s remorse. But such is life, isn’t it? You and I have no way of knowing whether XYZ stock (or any other stock, or the stock market) will be up or down in the next few months or years to come.

A 10b5-1 What? 

Your best plan for implementing a collar strategy may involve the use of a 10b5-1 plan. This arrangement allows for trades to be placed in the future at predetermined times and specified prices. This would be an example of a relatively simple 10b5-1 plan.

A more complicated plan may utilize targets based on the performance of the stock relative to various market or industry indices, or even relative to certain selected competitors. The plan itself must sufficiently identify the calculation of the relevant prices and triggers.  

Where insiders get tripped up is by attempting to alter the trading instructions in the 10b5-1 plan, even slightly, after the plans have been filed. Any attempt to alter the terms of the filed instructions can result in the loss of “affirmative defense,” which can allow an insider to make future trades that would be exempt from claims of insider trading.

Several strategies around the use of collars can be placed on different blocks of shares, and for different purposes. Let’s say that an executive has a large block of stock, and wants almost all of the downside protected. A “tight” collar (a call-put combo with strike prices that are close to the underlying stock price) would be in order here. A “loose” collar would have a much higher call price (say, $420 in our previous example), and much less downside protection with the put (perhaps $280 in our previous example).

An unusual example of the need for a collar could involve a shareholder’s health. If a wealthy owner of millions of dollars of stock wanted to lock in the price of his or her shares because their health was in decline, then a collar with a special maturity date could likely be arranged with the CBOE. Being able to lock in a price over the next two to three years (or more) could have tremendous value if a large owner of a given stock has been diagnosed with a terminal illness and wants their heirs to receive the full value of their shares without having to sell them now.

What’s Your Collar Style?

Please contact me at or 817.503.0100 if you would like more information about collar strategies in the Perceptive Executive Series. Next up: Where does the “big dough” go? It goes into private placement life insurance.

About Greg

Greg Hutto, president and CEO of Heritage Retirement Advisors, comes from a family of educators, so it’s no wonder he holds a bachelor’s degree in business from Texas A&M University, and a master’s degree in education from Tarleton State University. He spent years as a teacher and coach before entering financial services in 1996. After 14 years in the industry working for such powerhouses as UBS Paine Webber and Raymond James, Greg founded Hutto Retirement Advisors LLC in 2010, now Heritage Retirement Advisors. He holds both the Certified Financial Planner® (CFP®) and Chartered Financial Analyst (CFA®) designations. Additionally, he is the founder of Heritage Tax Advisors LLC. Greg and his wife, Angie, have three children. He likes to cycle, play golf, travel with his family. To learn more about Greg, connect with him on LinkedIn.