Recent market volatility has highlighted the pitfalls of concentrated single stock exposure. Many stocks have experienced sharp drawdowns, leaving investors searching for strategies to manage risk while also maintaining benefits of share ownership. Qualified Investors may look for tailored solutions to hedge and/or monetize concentrated single stock exposure. Equity Over The Counter (OTC) options offer the ability to customize features such as strike price, expiration date and settlement method.
If your main objective is to hedge your single stock position, you might consider an equity collar. A collar limits your downside exposure to a stock while still allowing for upside participation to a cap. For example, for a $100 stock, you could buy protection that creates a floor value of $80, and, instead paying for that protection with cash, you can pay by capping your upside at $120. Similarly, if you want to reduce volatility but also create liquidity, you might consider a Variable Forward Sale. Similar to the collar strategy, a Variable Forward Sale creates a floor and a cap, but you will also receive an upfront payment based on the present value of the floor price. Many clients utilize the upfront payment to diversify their investments. In a volatile market, Variable Forward Sales may be an especially attractive source of liquidity since they offer protection from margin calls and participation in future share price appreciation. These are just two of many structures we offer. The availability and terms of these and other financial products are customized by our team to individual client situations based on a variety of inputs and will vary depending on the underlying security and market factors, including volatility.
Contact your sales representative for more details, and for other ideas, explore the rest of our Trader Insights series.
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