Can someone explain how zero premilum collar helps someone with concentrated equity position. I really dont see this one doing anything to mitigiate concentration of portfolio. We are just keeping the value of stock within a band and am not sure how that equates to de-concentration??
It eliminates potential for large losses. That’s why you didn’t like the concentrated position in the first place.
concentrated positions, as TooOld began to point out are undesirable not for their potential returns, but for their potential losses due to lack of diversification. a collar for the most part eliminates the potential for lack of diversification to come back and bite you in the butt.
thanks very much. I was just focussing on how it iserves the purpose of diversifying never thought about the losses…
İt all starts with very effective hedges of the stock ( like short sale ag box, fwd conv. w. option, equity return swap). By thhese instruments you create a short posistion that offsets the value increse dercrease of the long stock. Then because you manage to protect the value of stock you can get a high LTV amount borrowing, With this money you diversify the portfolio, and no tax liability occurs.
Then I want some upside potential for the long stock portfolio, cost is the premium paid ( protective put). With PP ı protect downside and has some upside as price increase. But now I think the premium cost is too much, I want to reduce it and use cashless collar. Now I have long stock +( long put+short put). I go to bank and say " I have a CP and protect it with long short put… I want to use it as collateral and borrow money"…Namely, there is an effective protection by long put if stock price decrease, and I keep some upside potential if price increases ( not all upside because as price increase short call is exersied an sweeps off the gain above strike