Collar Programs for Concentrated Stock Positions

A startup founder holds $20 million of stock in the company they took public, most of it bought for pennies a share years ago. Selling even a fraction triggers a large capital-gains bill, and often the founder is restricted from selling much anyway. But they also can't sleep well with their entire net worth in one stock. Buying insurance without selling is exactly what a collar is built for.

A collar program for concentrated stock is a standing, often rolling, position: sell out-of-the-money calls to fund a purchase of out-of-the-money puts, on shares the holder keeps rather than sells. It converts an all-or-nothing "hold or sell" decision into a range of outcomes the holder chooses in advance.

Why "program" and not "trade"

A single collar expires in a few months, which is far too short a window for someone protecting a position they intend to hold for years. A collar program rolls the position forward repeatedly — as each collar nears expiry, it's closed and a new one opened at strikes reset to the current price. This is functionally similar to the laddered rolling used in overlay strategies, but sized around one large, illiquid, tax-sensitive holding rather than a diversified book.

Worked example

A founder holds 100,000 shares at $50, cost basis $1 (so nearly the entire value is unrealized gain, and selling would trigger tax on roughly $4.9 million of gains at the position's current size). They enter a 6-month collar: buy $42 puts, sell $58 calls, at zero net cost (a "costless collar," where the call premium exactly funds the put).

• If the stock falls to $30 at expiry, the founder can exercise the puts and sell at $42 — a $8-per-share buffer above the market price, preserving $800,000 versus holding unhedged.
• If the stock rises to $70, the calls are exercised against the founder, capping their effective sale price at $58 — they miss out on $12 per share of further upside, or $1.2 million, relative to simply holding.
• If the stock finishes between $42 and $58, both options expire worthless and the founder keeps the shares, having paid nothing net for six months of downside protection.

What this means in practice

Because the holder never sells the underlying stock in a costless collar, no capital-gains tax event is triggered by putting the hedge on — only if the puts are eventually exercised does a sale, and the associated tax, occur. This is why collar programs are common among executives with restricted or low-basis stock: they buy time and reduce risk without forcing the tax decision. Some jurisdictions and plans have specific rules (constructive sale rules, in the US) about how aggressive a collar can be before it is treated as an effective sale for tax purposes, so real programs are built with a tax advisor, not just a Greeks calculator.