Using Options to Hedge Large Stock Payouts

A liquidity event—like a business sale, IPO, or equity grant—can instantly turn athletes and entrepreneurs into $1M+ stock owners. But holding a concentrated position is risky: a single downturn can wipe out 20–30% of value. If you sell, taxes can claim up to a third of your gains (20% federal, 3.8% NIIT, plus state taxes). Hedging with options—puts, collars, and covered calls—lets you manage this risk without triggering immediate taxes or giving up all upside. Here’s how high-net-worth investors use options to lock in gains, protect wealth, and keep their plans on track.

How Options Hedging Works

Options are contracts giving you the right (but not the obligation) to buy or sell a stock at a set price by a certain date. Smart use of options protects concentrated stock windfalls:

• Put Options: Let you sell at a set price (the “strike”), working like portfolio insurance. If you buy a $95 put on a $100 stock, you’ll never get less than $95, even if the price tanks.
• Collars: Pair a put (downside protection) with a call you sell (upside cap), often at little or no net cost. This creates a price “corridor” for your shares.
• Covered Calls: Sell calls on stock you own to earn extra income. It softens small losses but limits gains if shares rise sharply.

A 2024 CBOE study found that hedging a $2M position with options could preserve $150K–$500K in a downturn. Costs include option premiums (typically 1–5% of stock value) and possible taxes if options are exercised. The key is finding the right mix for your risk and goals—protection, cost, and flexibility.

Case Study: The $20M IPO Stock Hedge

After a 2023 IPO, a tech founder held 200,000 shares at $100 each. A looming market dip risked a $4M loss—but selling would cost $4M in taxes. Instead, the founder’s team used options: protective puts (6 months, $95 strike) covered half the shares, a collar hedged another chunk, and covered calls on the rest generated $200K in income. When the stock fell to $80, the strategy preserved most of the value and offset losses with premiums—saving $3.5M vs. going unhedged, and avoiding forced sales or big taxes.

Five Options Strategies for $1M+ Stock Windfalls

1. Buy Protective Puts: Cover 50–75% of shares with puts 5–10% below the market. You keep upside but set a loss floor.
2. Use Zero-Cost Collars: For another portion, combine a put (downside) and a call you sell (upside cap), often at little or no net cost. You lock in a range and avoid big premiums.
3. Sell Covered Calls: On 20–30% of shares, write calls near the market price. This brings in income (1–3%/month) to cushion volatility.
4. Set Aside Cash for Premiums: Keep 10–20% of proceeds in a high-yield account. This lets you fund options premiums or seize opportunities without liquidating shares.
5. Review Hedges Regularly: Adjust puts/collars each quarter based on market volatility (VIX), tightening protection if turbulence rises.

Actionable Tips for Wealth Holders

• Monitor Concentration: Aim for no more than 30% of your wealth in any one stock. Use portfolio tools to check monthly.
• Compare Hedging Costs: Use online calculators (like CBOE’s) to price out puts/collars and keep costs below 2% of portfolio value.
• Get Expert Help: Work with an advisor or options specialist with real experience and proper licensing—mistakes can be costly.
• Watch Volatility: Adjust protection as market risk changes; don’t “set and forget” your hedge if conditions shift.
• Reinvest Smart: Use covered call income to fund tax-efficient investments (munis, dividend ETFs) for compounding.

Challenges and Considerations

Options hedging isn’t “set it and forget it.” Premiums (1–5% of value) are real costs, and tax rules are complex—call premiums are ordinary income, exercised puts create gains/losses. You need cash for premiums, and your team must follow compliance rules. Over-hedging can sap returns. Stay disciplined and keep an eye on both the markets and your plan.

Conclusion

Sudden stock windfalls can be a blessing—or a vulnerability. Options strategies like puts, collars, and calls are essential tools to protect wealth, control risk, and buy time for smarter long-term planning. Don’t leave your future to chance. If you want help crafting a hedging plan tailored to your situation, book a complimentary call at freedomcapitaladvisors.com.

Sources

1. CBOE. (2024). Options Hedging for Portfolio Protection. https://www.cboe.com/learncenter/education/hedging-strategies
2. IRS. (2025). Publication 550: Investment Income and Expenses. https://www.irs.gov/publications/p550
3. Morningstar. (2024). 2023 Market Volatility and Investor Strategies. https://www.morningstar.com
4. Fidelity Investments. (2024). Retiree Health Care Cost Estimate. https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/press-release/2024-retiree-healthcare-costs-05012024.pdf