This. Though I don’t really understand the benefit of the index hedge (is the purpose to weather a potential recession while locked up? Or is it because he was locked up from yahoo derivatives at the time)
At the risk of this being an essay, I'll respond to everyone's helpful suggestions. (and maybe find some brokers to call in the meantime) 1. It's pretty expensive due to the high implied volatility (in my mind too high) 2. Given that I see IV as too high, the calls are actually more attractive. 3. I didn't note this initially to keep things simple, but as spindr0 alludes to, I'm not actually going to use collars on all my positions - only those subject to long term cap gains already. For the ones that aren't (but will around the time the lock-out ends), a long put straddling them would suspend the long term gains holding clock, making this even more expensive by raising tax rate from long term to short term on the gains. My former employer also bans employees from trading derivatives. No restrictions on former employees. Ah thanks for the detail! I guess he was banned from hedging Yahoo directly under lockout, hence he relied on the index. Correct on the tax implications. From my rough calculations though, it seems that writing qualified covered calls against the tranches I'm waiting for long-term cap gains is the best hedging strategy I have. Unqualified covered calls wipe about 10% of my expected future value away due to tax changes - the cost of a put PLUS the tax disadvantage simply isn't coming out as worth it. I explored using QCCs alone since (barring very low probability events [1]), the downside is dampened. i.e. using Black Scholes modeling 10% probability collapse is my stock dropping 40% (now reduced to 30% thanks to writing options) vs. S&P 500 dropping 17%. Given the 10% tax advantage (at 0% change), this feels worth accepting. Ya, this was also mentioned in a sibling thread. It is a solution if I'm stuck with margin, but it pretty costly (roughly halves what I can receive from the options due to high volatility/reg-T margin calculations on spreads). [1] Yes, re: 2008, famous last words
Ok, I got lazy and admit that I did not read all the responses. If your short calls and your stock are held at different brokers, to get an offset of risk and margin it would require a tri-party agreement. I'm not an expert on these so here is some information on the BNP Paribas website. Basically, the broker holding your stock agrees to hold the security as collateral for another broker but you still agree to be responsible for losses and pay the fees. http://securities.bnpparibas.com/insights/welcome-to-the-tri-party.html
I was just trying to answer the question. Most company stock plans are at Computershare. I do not expect they do this.
I can only surmise that because Cuban could only utilize an index where Yahoo was less than 5 pct of the index that there were other SEC restrictions during the lock up period. As you suggested, it would make more sense to take a hedging position in Yahoo for direct correlation.
It's clear from reading your replies that you have a good handle on the possibilities so I'm not going to take a deep dive into analyzing the what ifs. You've already done that. Plus, all of the choices makes my head hurt Speaking in general terms, each defensive strategy has its own R/R and each one performs better/worse in a different scenario (note 2008). So my generic advice would be to focus on the core problem which is a very concentrated portfolio in a single stock and secondarily on haircut you take from the hedge.
spindr0 said: "I'd take a look at selling OTM bearish call spreads to fund a portion of the cost of a long protective put. No cost if you lower the put strike." fgopc1 said: "Ya, this was also mentioned in a sibling thread. It is a solution if I'm stuck with margin, but it pretty costly (roughly halves what I can receive from the options due to high volatility/reg-T margin calculations on spreads)." The margin on a spread is the difference in strikes less the premium received. If IV is high, you'll receive a larger credit for selling the bearish call spread. If anything, it could double the credit received. The problem will be that the high IV inflates the cost of the protective put and with no offset, it could be a multiple of the spread bump. Again, AFAIC, the priority is protecting the principal of the underlying not the haircut on the options.