I’ve helped investors and real estate owners quantify risk and design practical hedges for years, and one of the most common problems I see is a concentrated stock position — often an employee with most of their net worth parked in one company. Options are a powerful, flexible tool to reduce that tail risk without necessarily selling shares and triggering a taxable event or giving up upside. Below I walk through the approaches I use and recommend, the tradeoffs, and a simple, reproducible framework you can use to choose strikes, expiries, and sizing.
Why hedge a concentrated position with options?
A concentrated equity holding is a risk-management problem. You want to keep upside exposure to a name you believe in, but you also want to cap the damage if something unexpected happens — regulatory shock, earnings miss, or broader market turmoil. Options let you:
That said, hedging isn’t free. The art is striking a balance between protection and the drag on long-term returns. My goal in most engagements is to create a hedge that meaningfully reduces run-away loss potential while keeping a reasonable chance at upside — and doing so in a repeatable, cost-aware way.
Hedge structures I use most
Here are the go-to option structures for concentrated positions, with pros and cons in practice.
Pros: Simple, symmetric protection, unlimited upside retained. Cons: Premium can be costly during high implied volatility; repeated renewals add up.
Pros: Generates income to reduce cost basis; easy to implement. Cons: Caps upside at strike (you may be assigned); offers limited downside protection compared with puts.
Pros: Can be structured as a low-cost or near-zero-cost collar. Limits downside while preserving some upside up to the sold call strike. Cons: Upside capped; if structured aggressively, may still leave gaps in coverage.
Pros: Provides downside protection with little immediate cash outlay. Cons: Usually requires wide strike distance; protection band may still be large; rolling costs can accumulate.
Pros: Cheaper than a naked put, and still provides a defined floor within the spread. Cons: Protection limited to the spread width; additional downside below sold put.
How I decide which structure to use
I follow a short checklist for each client or portfolio I work with. You can use this yourself as a decision framework.
Example: If you’re pre-IPO employee facing a lockup expiry in 3 months, I often favor a short-term protective put or a collar that expires after the lockup. If you’re a long-term investor with a decade horizon but massive concentration, I prefer staggered collars (rolling protection across expirations) to smooth costs.
Choosing strikes and expiries — practical rules I use
Strike and expiry selection is where most hedges either succeed or fail. Here are rules that make the outcome predictable.
Example payoff table: simple collar
| Stock price at expiry | Outcome (own stock + bought put at 80 + sold call at 120) |
|---|---|
| $140 | Assigned at 120 → realized gain capped at +20 (minus net premium) |
| $120 | Called away at 120 → keep gains to 120 |
| $100 | No call assignment, put not exercised if >80. Equity loss to 100, net cushioned by put intrinsic and call credit |
| $70 | Put exercised at 80 → net sale at 80 (less premium paid/received) → downside limited |
That table is simplified but captures the tradeoffs: a collar gives you a band of outcomes rather than full insurance or full exposure.
Common implementation mistakes I see (and how to avoid them)
Practical step-by-step to implement a collar
I often set rules like “roll if the call is within 5% of being ITM with more than 10 days left” to avoid last-minute assignments that can be costly or tax-inefficient.
Taxes, assignment and execution nuances
Options can trigger taxable events if you’re assigned. American-style options can be exercised early, so be aware of dividend dates and ex-dates that can prompt early calls. For employees with insider restrictions, documented hedges can be a minefield — always check company policies and consult tax/legal counsel.
Execution: if you’re using retail platforms, be mindful of option syntax, multi-leg order types, and routing. Which broker you use matters — some platforms provide legging protection and execution for collars, reducing slippage.
When not to use options
Options are not a substitute for a thoughtful diversification plan. If you have the ability and tax capacity to sell shares gradually, that can be cheaper in the long run. Also, if options market is illiquid or spreads are enormous (small-cap stocks, OTC names), physical sale or other hedges may be preferable.
Hedging a concentrated position with options is a toolbox, not a silver bullet. When structured carefully — with clarity on time horizon, strike selection, liquidity and costs — options can reduce devastating downside while preserving meaningful upside. If you want, I can run a simple collar proposal for your position: tell me the ticker, shares owned, and the time window you want to protect, and I’ll sketch concrete strike and premium scenarios you can execute or take to your broker.
