The equity collar is an inexpensive form of portfolio insurance. A collar has three components: a stock that is being acquired or is already owned, plus the purchase of a Put option, plus the sale of a covered Call option. The Put option is purchased to insure the stock against significant loss, and the covered Call option is sold to either partially or completely offset the cost of the insurance (the Put option). The equity collar strategy allows investors to be in the stock market without taking the full risk of the market. “The beauty of a collar is that you know, from the outset, the potential gains and losses.” |
This strategy appeals to two kinds of investors: those investors who need to seek a higher return to meet their long term financial goals but are uncomfortable with taking too much risk, and those investors with substantial assets who worry about the possibility of a catastrophic event wiping those assets out. Our clients are generally longer term investors, not short term traders. |
| There are two major differences between a stop-loss order and an equity collar. First, if a stock stops trading and gaps down, the stop-loss order will have no effect until the stock reopens, which may be substantially below the limit price of the stop. By comparison, the Put portion of the collar can be exercised at the strike price, regardless of how low the stock may be trading after it reopens. Second, a stop-loss order automatically kicks you out of a stock when it reaches the limit price, which may in fact be when you should consider buying more shares. With a Put option, you have the opportunity to wait and see if the stock bounces back, which it often does. |
Our long-term investment goal is to participate in the returns of large cap stocks, but to do so with less risk because of the collar protection. A good benchmark of five-year performance would be the S&P 500 on a risk-adjusted basis. |
| Our firm opened September 2, 2005 so our track record begins with the 4th Quarter 2005. To view our quarterly performance, view our Manager Profile. After the 2000-2002 bear market and 9/11, we realized the need for a portfolio management approach that protected investors from catastrophic losses. This led to developing our dual approach of buying stocks and immediately wrapping them with equity collars to produce an insured portfolio, because to our knowledge, no investment advisory firm offered this particular investment approach. We do not hold ourselves out as having a “crystal ball,” but rather we invest in stocks that, when collared, provide potential rewards significantly greater than potential risks. It is interesting to note, however, that an attractive collar (a high premium for the Call option relative to a small premium for the Put option) often indicates that option investors are bullish on that stock. Investors are not able to look far back and see how this approach performed in the past, but looking forward, “the beauty of the collar is that you know, from the outset, the potential gains and losses.” - BusinessWeek (2/20/06) article featuring our firm. Read this and other articles about our firm. |
Equity collar annual fees are 0.8% of the account value with a minimum account size of $5,000,000. Account fees and minimum size in some cases can be negotiable. At this time, there is no maximum account size. |
A significant percentage of an account may be in exchange traded funds (ETFs) such as SPY (S&P 500) if attractive collars for the ETFs are available. Individual stock holdings will mostly be in large cap stocks diversified by economic sector with no sector typically representing more than 25% of the total weight. Also, to smooth returns of the overall portfolio, stocks with attractive collars and low correlation to the equity market (such as gold stocks) will often be included. |
Yes. In fact these may be preferred because many tax and bookkeeping issues that effect taxable accounts are moot for these types of accounts. Also, retirement accounts often represent the bulk of the investment “nest egg” where protection of the principal is of paramount importance. |
SPA uses only Listed Options that are backed by the Options Clearing Corporation, which is AAA rated by Standard & Poors. See S&P Credit Report. |
| If you wish to open an account, we will assist with the necessary paperwork and guide you through the process. Please contact us. |
At this time, we primarily use Charles Schwab and TD Ameritrade as brokerage custodians. |
The brokerage firm where you custody your account will provide you with regular statements and trade confirmations. You will also be able to view your account values and any account activity online. |
There is no minimum time period obligation. Also, the equity collar positions in your account are marketable securities which upon termination of our management contract can be liquidated at your discretion. |
| Not in our opinion. There is no “free lunch” because a collar investor normally forfeits potential gains above the call’s strike price in exchange for the downside protection from the put. |
| Probably not. The pension plan would need to allow the purchase of a protective put and the selling of a covered call to collar the stock position. |
| You could be. One example is when the put option expires, if the stock is between the put and call strike prices, the stock might be un-hedged until it is either sold or re-collared with new options. |
| There can be similarities. Like collared stocks, some structured notes employ derivatives to limit investment risk. We believe Collar Investing may offer a better risk/reward equation than some structured notes, and may have greater transparency because with Collar Investing the derivatives employed and any costs are visible to the investor. |
| Unlikely; SPA primarily uses Large Cap stocks for collaring where both the stock and underlying options have considerable liquidity. Also, option pricing models and market forces will most likely keep put and call market values in parity. |
|
|
| Most Investment Advisors focus on stock selection first, and hedging second. With SPA, the primary focus is on collar selection; finding those combinations of stock and collars offering the most favorable risk/reward, which is why we named this new discipline Collar Investing. |
|
Copyright ©2010 Summit Portfolio Advisors, LLC. All Rights Reserved.
|