This series has been about one problem: a position too large to sit in safely, but not simple to unwind either. Last week covered how to sell — spreading it out systematically, so no single day and no single emotional impulse decides the price. This week is about what happens before that: you're not ready to sell yet, not because you're forbidden to, but because dumping it all into one tax year, or exiting mid-holding-period, or abandoning a 10b5-1 plan already in motion, would cost you more than waiting. That's the problem a collar was built to solve.
A collar places your stock inside a range. You buy a "put" that establishes a floor beneath your shares. It buys you the right, not an obligation, to sell your stock at a specific price on a specific date. Say your stock's market price is $100. You can buy a put at $90. So even if the stock drops to $60, you can still sell the stock for $90. It's basically insurance, and insurance cost money. You sell a call that creates a ceiling above the stock. You collect the premium for that contract. And the buyer of the "call" now has the right to buy the stock at the strike price, on the specific date. Often those two premiums roughly offset each other — what's known as a costless collar.
You haven't diversified. You haven't sold. You've simply traded unlimited outcomes for a narrower range. That's enough, for now.
You either pay for protection with cash, or you pay for it with opportunity.
A funded collar requires paying part of the option cost yourself, allowing you to place the call strike further above today's stock price and preserve more upside. A costless collar avoids writing a check by selling a call closer to today's price, giving up more of the future appreciation instead. Neither is free. One asks you to pay with cash today. The other asks you to pay later by surrendering some future gains.
Who Actually Gets to Use One
There are two separate gatekeepers here, and most people only know about one. The first is the law — officers and directors face restrictions on hedges resembling a short sale. The second is your own company's hedging policy, and surprisingly, it's usually the bigger obstacle. Most public companies ban collars outright, often reaching well beyond what the law requires — sometimes to every employee holding company stock, not just insiders.
Which means the real first move, before any conversation about strikes or premiums, is simply asking your equity administrator what your company actually allows. The law rarely stops you first. Your own company usually does.
The Irony in the Tax Code
Here's the part I find genuinely interesting. If a collar eliminates too much of your risk — floor and ceiling squeezed too close to today's price — the IRS can decide you've effectively sold the stock, and tax you as though you had. There's a name for this: the constructive sale rules. A collar can become so perfect that the tax code stops treating it as a hedge at all.
A collar can become so perfect that the tax code no longer treats it as a hedge — it treats it as the sale you were trying to avoid.
So the collar has to stay wide enough to remain a hedge in the eyes of the tax code, not just in your own head. There's real technical detail in exactly how wide is wide enough — I'll leave that at a conceptual level here.
What a Collar Actually Solves
A collar doesn't solve concentration. It solves timing. It gives you the luxury of deciding when to unwind, instead of being forced to unwind at the worst possible moment. Eventually, the shares still need to be sold, donated, exchanged, or otherwise diversified. The collar simply buys you the time to do that deliberately, on your own terms, instead of the market's.
Next in The Study: exchange funds — one of the few strategies that can actually diversify a concentrated position without immediately triggering capital gains tax.
Joshua Staph, CIMA®
Founder, Verak Private Wealth · joshua@verakprivatewealth.com · verakprivatewealth.com
The views expressed are those of the author and are for informational purposes only. Not investment, tax, or legal advice. Individual companies are mentioned for illustrative purposes only and do not constitute a recommendation to buy or sell.
Securities offered through Cambridge Investment Research, Inc., Member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Verak Private Wealth LLC and Cambridge are not affiliated.