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Concentrated Stock Investment Strategy

Post on: 1 Май, 2015 No Comment

Concentrated Stock – managing risk and achieving diversification with a disciplined process

Gould Asset Management provides a variety of investment services related to the management of large investments in a single stock, referred to as concentrated stock positions. Concentrated positions can take the form of outright stock holdings, as well as highly valued unexercised employee stock options. Gould specializes in advanced options strategies to manage and control the risks of these types of large, undiversified holdings and can implement a number of different options-based strategies to meet the unique needs and objectives of each client.

Examples include covered option-writing strategies to generate extra cash flow and thereby reduce the downside risk of the position, and zero-premium “collars” to lock in a range of potential outcomes.

Benefits from Gould’s management of concentrated stock positions may include:

Diversification – Concentrated stock positions often constitute a large portion of a client’s liquid net worth and result in excessive exposure to the specific risks of a single company. Gould can hedge or diversify this risk to suit the investment objectives and risk tolerance of the client.

Risk Reduction/Income Generation – In some situations, investors may be more concerned with generating additional income from concentrated stock positions than with diversifying. Gould works closely with clients to develop a long-term strategy to increase the income generated from these positions through the use of covered call-writing strategies. The extra cash flow derived from a call-writing strategy has the effect of cushioning the client somewhat from a decline in the price of the security.

Tax Management – In many situations, concentrated stock positions may have a low cost basis that makes an outright sale of the securities unattractive from a tax perspective. Gould offers a number of approaches for potentially mitigating and/or spreading the tax impact across many years.

Custom Hedges – Often it is the case that a client with a concentrated stock position has retired or changed jobs after a long period of employment with the company in which he or she holds stock. As a result, the client may have unique insights into its potential for growth or its particular risk factors. In these situations, Gould can customize a hedge to provide protection if the stock were to fall to a certain price level, or upside participation if the stock were to advance to a certain price level. If so desired, Gould can balance upside potential and downside protection in a manner that results in minimal initial out-of-pocket cost to the client.

Sample Scenario: Suppose a client has been a senior level employee for company XYZ for many years, and over time has accumulated a concentrated position in XYZ stock worth approximately $1,000,000. The client feels confident that XYZ stock is in a strong financial position and has the potential to appreciate over the next 1-2 years, but is concerned about the potential for recession in the coming months and would like to hedge a potential short-term decline in the stock.

Gould Solution: Using a customized option writing program, Gould could construct a hedge around the position that would protect the client against the first 10% — 20% decline in XYZ, and provide upside participation up to 20%. This could potentially be achieved with minimal tax impact, allowing the client to defer realization of capital gain on the concentrated XYZ position.