Help me understand collars?

[bltkmt]

Children eyeing the potential inheritance are worried they will get less, rather than worried about what is best for Mother.

Really?

 

[ivinsfan]

Really?

Don't get offended but this is kind of what's going. Nothing wrong with it, but your Mom has more then enough money for the rest of her life. I don't agree with you not worrying about what's best for Mother that was kind of a low blow , you are trying to maximize her estate, follow her wishes and mitigate downside. People do this every day.



You don't say how mentally alert your Mom but she probably thinks if it ain't broke don't fix it...

 

[ERD50]

Quote:
Originally Posted by Sunset View Post

Children eyeing the potential inheritance are worried they will get less, rather than worried about what is best for Mother.

Really?

I really don't see it as Sunset does.

I don't see any evidence that they are putting their interests ahead of Mom's interests. She has a lot of concentration in that stock, wanting some protection is rational for everyone.

Looks like Mom wants to pass this down to her kids. I doubt she'd want to see a big chunk of it disappear due to single stock risk.

Seems like everyone's interests are aligned, IMO. I don't see a problem at all.

-ERD50

 

[pb4uski]

Would the protective put or collar be bought with Mom money or by the the heirs?

If the OP and brother/executor are the only heirs then they could set up a joint account for just the two of them, fund it with their money and buy puts or collars that would hedge the risk of DM having $3m in SNA.

Alternatively, does DM have an investment advisor who could talk to her about the risk of her concentrated portfolio and convince her to either pare back on SNA or perhaps purchase a protective put or collar, or perhaps a combination of both?

 

[ERD50]

Would the protective put or collar be bought with Mom money or by the the heirs?

If the OP and brother/executor are the only heirs then they could set up a joint account for just the two of them, fund it with their money and buy puts or collars that would hedge the risk of DM having $3m in SNA.

Alternatively, does DM have an investment advisor who could talk to her about the risk of her concentrated portfolio and convince her to either pare back on SNA or perhaps purchase a protective put or collar, or perhaps a combination of both?

That's an interesting idea that could pretty easily be done by buying puts in their own account.

But if they wanted to sell calls to offset the cost of the puts, how would they do that w/o owning the underlying stock in their account?

OK, I got curious, so can somewhat answer my own question. In the following video, he explains how you can buy deep in the money calls that move up/down pretty close to the stock, but at ~ 1/4 of the upfront cash. Still a lot of money to put up, but it can be done.

-ERD50

 

[thefist]

I pulled up SNA on my Morningstar Premium account. They peg the fair value at 168. So, per their discounted cash flow analysis, it's 34% over valued.

At that level, I agree with others that selling some is a prudent thing to do. That said, M* is one opinion and they have been known to reevaluate companies and increase FV considerably. They are also better at large caps, so YMMV with their valuation of small caps.

With ANY individual stock, a 10% drop is pretty common in any given year. SNA looks to be in one now. Perhaps you can buy a put at a level 10-15% below (190-200) to protect you below a larger drop. Dec17 200p closed today at 4.90, so your breakeven is 195.10 there. If you go with a collar, try the written call at or above the 52 week high, which is 259. Those don't pay much, but they do offset the cost of the put somewhat.

Insurance isn't free.

Remember puts and calls can be rolled forward if need be. But that doesn't work as well if the stock moves a lot.

 

[Ready-4-ER-at-14]

I was wondering could the mother sell short some of the stock in her portfolio while still keeping it, essentially freezing the gain for the amounts sold short. I assume she gives up the dividend and there is some cost somewhere and she might be required to sell if broker demanded payment with a big run up or difficulty in borrowing stock to short.

No idea of tax ramifications or suitability but something not considered here yet.

 

[pb4uski]

I thought of that too, but from what I read it sounds like selling short against the box is the same as just selling it from a tax perspective so I wouldn't go there.

 

[MRG]

SNA? I might not worry about the concentration and just enjoy life.

 

[thepalmersinking]

If she does not want to sell then go in the opposite direction and buy a way out of the money leap instead.