Saturday, May 27, 2000
How to safeguard holdings
By Amy Higgins
The Cincinnati Enquirer
Problem: You have large assets tied up in a single stock, risking heavy losses in a volatile market.
Strategy: Create an equity collar.
Tom Mench, chairman of Mench Financial in Kenwood, says an equity collar ensures that a large market position in a single stock won't blow up in your face.
To create an equity collar, you typically buy a put option with a strike price of 80 percent to 90 percent of the current price of your stock. That gives you the right to sell your stock for no less than that amount.
Even though you'd rather not sell, this limits how much you'll lose if the bottom falls out of the stock price.
To pay for the put option, you could sell a call option that gives the buyer the right to acquire your stock at a predetermined price.
If the stock is trading at $100, for example, you might buy a put option with a strike price of $90 and sell a call option with a strike price of $150. You could still get up to a 50 percent gain above the current price, but once the price exceeds $150, you'd likely have to sell your shares. The costs of the options might offset each other, providing you with a cashless collar, one that doesn't cost you anything out of pocket.
Structuring a collar is simplest and cheapest with large-cap stocks. However, you may be able to do it for any stock that has at least a $500 million market capitalization, a price of $20 a share or higher and daily trading volume exceeding 75,000 shares. And while collars can be created on positions as small as $1 million, they're generally built around positions of $2 million or more.
For someone who is willing to sacrifice some upside potential to partly hedge against downside risk, a cashless collar is worth considering. Setting up a cashless collar probably isn't something to try without professional help.
Readers: Consider Savvy Strategies as general information only and seek the help of professionals because circumstances might vary.
Planners: Share your unique strategies or new approaches with the Enquirer and our readers. Send your Savvy Strategies to Amy Higgins, 312 Elm St., Cincinnati, 45202 or e-mail email@example.com.
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