How to Protect a Concentrated Stock Position Without Selling It

There’s a moment that tends to catch even the most financially sophisticated executives off guard. It doesn’t usually happen when the first equity grant vests, nor when the stock doubles or triples. It happens years later when you finally realize that what once felt like a modest equity award has quietly grown into a multi-million-dollar position. 

At that point, the question is no longer how much higher the stock might climb, but how much of your financial future should remain exposed to the fortunes of a single company. That question becomes especially important when the market is in a frenzy, valuations are elevated, and market leadership is narrow, as is the case today. While selling shares outright may be restricted, tax-inefficient, or emotionally difficult, options can provide another path.

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Options are contracts tied to a stock that give an investor the right or the obligation to buy or sell shares at a predetermined price within a specified period. While they are often associated with speculation, options can also be used defensively, much like insurance, to limit how much value could be lost if a stock falls sharply. Using options allows a person to establish a floor beneath a large, concentrated stock position, reducing the potential damage from a sharp decline, and preserving more of the wealth they have accumulated. 

Marc Cuban, for instance, famously made his fortune by selling his company—Broadcast.com—to Yahoo in 1999 in an all-stock transaction where he received approximately 14.6 million Yahoo shares, then worth roughly $2 billion. Because he was worried that the market had peaked but was also temporarily restricted from selling the stock, he used options to protect the position. 

Rather than gamble that Yahoo’s extraordinary rise would continue, Cuban worked with his broker to purchase puts and sell calls around the position, effectively placing a floor under his fortune while surrendering some additional upside. When the dot-com bubble eventually burst, the hedge preserved most of the wealth that he had created. 

Cuban’s experience is an extreme example, but the underlying problem is common among senior leaders of public companies whose wealth has become increasingly tied to a single business. The purpose of hedging is not to call the top of the market. Rather, it’s to recognize that once a concentrated position becomes large enough to determine whether you reach your most important financial goals, protecting against a catastrophic decline can matter more than capturing every additional dollar of upside. 

While a collar is a more sophisticated hedging technique, at the most accessible end of the spectrum is a strategy referred to as “covered calls.” At its core, a covered call is simply an agreement to sell a portion of a stock you already own at a predetermined price within a specified timeframe. And in exchange for making that promise, you receive cash up front, otherwise known as the option premium. 

For example, suppose CrowdStrike’s stock is trading at $700 per share today, and your basis in the position is $100. Rather than selling the stock and immediately creating a taxable event, you might choose to write covered calls on 20% of the position and set a strike price of $805—about 15% higher than the current market value.  

Two things can happen from here. If the stock never reaches $805, the options expire worthless, and you keep your shares plus the premium collected. In effect, you’ve generated income from a position you were already planning to hold. 

But if the stock rises above $805, those shares are “called away.” In other words, they are sold automatically at that price. While this caps some upside, it also enforces discipline by exiting a portion of the position at a level that you pre-determined was attractive enough to sell. This is why covered calls often appeal to executives of a company who are hesitant to sell. It creates a middle ground between holding indefinitely and liquidating outright. 

While covered calls can generate income and create a disciplined path toward reducing a position, they do not provide meaningful protection against a severe decline. For someone whose primary objective is to preserve an existing level of wealth rather than generating additional income, a protective put may be a more appropriate next step. 

A protective put involves purchasing the right to sell shares at a predetermined price before the option expires. Suppose CrowdStrike is still trading at $700 and an executive purchases puts with a strike price of $595—approximately 15% below the current market value. If the stock falls below $595 during the life of the option, the put effectively places a floor beneath the protected portion of the position.  

The executive retains the stock’s upside if it continues to appreciate while limiting the potential loss below the chosen strike price. The tradeoff, however, is cost. Unlike a covered call which produces income up front, a protective put requires the investor to pay a premium. And if the stock remains above the strike price through expiration, the put may expire worthless, and the entire premium can be lost.  

In that context, protective puts are akin to insurance, as the strategy involves more cost than writing a covered call, even though it provides substantially greater protection against a market decline. It’s also less sophisticated than a collar because it uses only one options transaction rather than combining a purchased put with the sale of a call. 

That cost can become significant when the stock is volatile, or the protection extends over a long period. But for an executive whose concentrated position already represents enough wealth to fund all their future financial goals, paying a premium to protect that fortune can be preferred over leaving it entirely exposed. 

With that in mind, the goal is not to find the most sophisticated hedge or eliminate every possible scenario where a loss might occur. It’s to decide how much downside your financial plan can reasonably absorb, how much upside you are willing to forfeit, and what level of cost you are prepared to accept in exchange for greater certainty. Once a single position has created life-altering wealth, the priority should gradually shift from maximizing what it could become to protecting what it already is. 
 

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Malcolm Ethridge is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. His areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.  

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Disclosures: 

The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your tax and legal advisors before taking any action that could have tax and legal consequences. 

Investments in securities and insurance products are: 

NOT FDIC-INSURED | NOT BANK-GUARANTEED | MAY LOSE VALUE