Does Your Concentrated Position Need a Collar?

The Trade-Off Is Emotional but Intentional:
Investors often feel regret when the stock rises past the call strike—but the strategy’s purpose is to reduce the risk of large losses, not to chase all potential upside. It’s a risk-management tool, not a speculative bet.

Ideal for Concentrated Stock Holdings:
Clients with significant positions in a single stock (often from IPOs or company awards) benefit most. A collar reduces volatility exposure without triggering taxes from immediate liquidation.

Discipline Over Hope Is the Core Philosophy:
Like the saying “you can’t have your cake and eat it too,” collars force disciplined investing. Protecting wealth requires setting realistic expectations about outcomes—not hoping for best-case scenarios.

Not since the dot com craze of the late 1990s have I come across so many new clients with large concentrated positions in their portfolios. One of the most common challenges we face with clients holding concentrated stock positions is the emotional tug-of-war between wanting protection from a sharp drop in value and not wanting to give up any future upside potential. In this dilemma, it’s worth remembering the old saying: “You can’t have your cake and eat it too.”

When it comes to portfolio protection, this phrase rings particularly true with a strategy known as a collar.

Using a Collar for protection

What is a Collar?
A collar is an options strategy designed to limit both gains and losses on a specific stock position. It involves two key parts:
– Buying a put option: This gives the investor the right to sell the stock at a predetermined “strike” price—effectively putting a floor on potential losses.  The put option in a collar provides a floor: it limits how much the stock can decline.
– Selling a call option: This obligates the investor to sell the stock if it rises above a certain strike price—thus capping the upside.  The premium received from selling the call helps offset (or sometimes completely pay for) the cost of buying the put.

What’s the Trade-Off?
By design, a collar creates a protective zone: it can shelter your portfolio if your stock drops sharply—but it also gives up some of the potential if the stock rallies strongly. This is not a flaw, it’s the cost of protection.

Many investors struggle emotionally when the market or a specific security surges after the collar is in place. “Why did I agree to limit my gains?” they wonder. The answer lies in the original objective: “I want to reduce the risk of significant loss, and not gamble for runaway gains.”

Concentrated Positions Need Discipline
For clients with large holdings in a single company—perhaps from an IPO, company stock awards, or long-term ownership—volatility isn’t just stressful; it’s a real threat to financial security. A collar is a disciplined way to reduce that risk without immediately liquidating the position and triggering taxes.

But when the market or your specific security is up, it’s tempting to regret that discipline.

Let’s consider a stock trading at $100:
– You buy a put at $90, limiting your downside to a 10% loss.
– You sell a call at $110, limiting your upside to a 10% gain.

If the stock:
– Drops to $80 → your losses are capped near -10% thanks to the put.
– Rises to $120 → your gains are capped at +10% because the call is exercised.

How a 10% Collar Strategy Limits Both Losses and Gains

Source: ACM Option Services

This kind of defined range of outcomes is intentional. The strategy is built for peace of mind, not for chasing returns. The risk of stock concentration is far worse than the limitation of your participation in possible upside moves. See our wealth commentary “You Can’t Win a Loser’s Game: Why Concentrated Stock Positions Are a Risky Bet”.  There are a number of additional proven methods to diversify away from concentrated positions including but not limited to, strategic tax loss harvesting, gifting and charitable giving.  Download our “Concentrated Stock Risks and Rewards” brochure.  Ask your ACM Wealth Advisor for additional guidance.

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