Holding a concentrated investment portfolio is inherently risky. Some investors, particularly company executives who are compensated in part with shares, can end up with very large positions in one stock.
If you have a large equity position and would like to diversify your holdings, we offer a number of strategies that can help you reduce your exposure.
If you own a large stock position and want to protect your investment from downside risk, consider purchasing put options. A put option, which enables you to sell stock on a future date at a predetermined "strike" price, can establish a floor price for your position. Buying a put option is a little like buying insurance.
Do you receive a significant portion of your compensation in stock options? Do you find yourself limited in the steps you can take to diversify your portfolio? PNC Wealth Management can help you unlock the value of options without a significant outlay of cash.
You can use a prepaid forward sales agreement to protect your position from a decline in stock price, retain some upside potential and generate cash flow that you can use to diversify your holdings. Unlike some option-based diversification strategies, the prepaid forward contract will allow you to invest all your proceeds in the market.
If you're willing to sacrifice some upside potential to avoid downside risk, an equity collar can protect your position. Buy puts and sell calls to establish a floor and ceiling around the stock price. An equity collar can be constructed with little or no cash outlay, since the call premium you receive can offset the put premium you pay.
An equity collar with a loan provision combines the hedging advantage of an equity collar with the monetizing benefits of a loan. Since the equity collar assures the value of your position at maturity, you can borrow against it. If you're borrowing to reinvest in the stock market, you're limited to a loan of no more than 50% of your position's value.
If you want to generate income based on an equity position, you can sell call options to do so without selling your stock. Remember though, that when you sell call options you limit your upside potential. If the stock price rises, the options will be exercised and you'll have to sell at the below market strike price. Use this strategy when you believe that a stock has limited upside potential.
If Rule 144 securities regulations preclude you from selling shares publicly, you can arrange a private sale with PNC as your counterparty. Eliminate your exposure and generate liquidity.
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