In question 2, the strategy to diversify a large holding in one company, equity collar is given as the best choice by CFAI but they accept “exchange fund” as an answer as well. However, they mention that the equity collar cannot be used as an inappropriate choice. Aren’t option strategies short term in which case an equity collar may not be able to help protect the portfolio for a long time. Is there anything wrong with this reason for not using an equity collar ?
you roll options
you can buy more options when the old ones expire
I can go and buy some December 2010 calls right now on the S&P, so it doesnt have to be ST.
Have ‘Equity collar’ ever appeared in Schweser or CFA curriculum?
zero cost collar doesn’t have to be interest rate collars… they can be on equities as well… that would be an example…
it is covered in CFA curr along wiht Variable Prepaid Forward
Yo, what’s a variable prepaid forwards again?
I thought CFAI did a fine job of anchoring on this question. I thought an equity collar was a poor choice as you lost the upside. Clearly you could only cover half of it, but they didn’t say that in the question.
variable prepaid forward is when you put a zero-cost collar/equity collar on a concentrated stock position and then borrow 70-90% of the value of the position and invest that money in a diviersified set of assets. Problem with it is that it has to be rolled over and its gets expensive
question: on te VPF, don’t you actually SELL it forward to get the loan, and hence are locked into selling at a future date, at which point you get taxed…i thought it was mainly a tax-deferral mechanism (but in the meantime, you get to diversify)
bigwilly Wrote: ------------------------------------------------------- > variable prepaid forward is when you put a > zero-cost collar/equity collar on a concentrated > stock position and then borrow 70-90% of the value > of the position and invest that money in a > diviersified set of assets. Problem with it is > that it has to be rolled over and its gets > expensive This wasn’t allowed in the question though as leverage was not allowed.
I didn’t see how an equity collar maintains significant upside potential. Wasn’t that part of the question?
it didnt say significant. It said “preserve some upside” hence if the stock is at 100 and I buy a put for 90 and sell a call for 105, I have $5 worth of upside potential…
Equity collar is levered. Short 1 option Long 1 option Thats leverage in my mind. The fact that you are long the underlying doesnt matter. And it gets even better, if the stock rally’s hard. You either draw down on your cash and hold the underlying stock (leverage) or you sell your stock, and EAT the tax gains to cover it. The question is fataly flawed.
BigWilly, your definition of variable pre paid forward is actually a way to monitize a collared position. A variable pre paid forward is just buying a future now for up front cash and paying for it with your low basis equity in the future.
Chip, you dont havfe the cash so you use the stock as collateral.