Market Beat: Managing concentrated equity positions |

Market Beat: Managing concentrated equity positions

Ken Roberts
Market Beat

Some people have a substantial percentage of their net worth tied up in one stock. Many investors in this situation have worked for the company and built up their stock position from their employee stock purchase plan or from stock options. Others may have inherited the stock or accumulated the shares in the open market.

In general, investors should be very cautious if they have too much exposure to one stock. They are subject to company specific risk, which means that the stock could have a downturn due to events that affect that particular company.

Company specific risk is very easy to minimize by diversification. So, if you have a large exposure to one stock you should sell some of the shares and diversify your holdings.

There may be some situations where you don’t want to sell any of your stock in spite of the risks associated with having a large position in one stock. If you have a good gain in your stock you may not want to sell due to tax considerations. Some people are reluctant to sell a stock that has made them quite a bit of money over the years and still may have a strong future.

Options, though not suitable for all investors, may be used in various ways with concentrated equity positions to provide downside protection, extra income or both. With any option strategy there is always an advantage and a disadvantage, so you must evaluate them carefully.

Purchasing put options gives the owner of the contract the right to sell the underlying stock at a set price known as the strike price by a certain date, which is the expiration date. Buying puts is kind of like buying insurance on your house, it costs money and you hope you’ll never need it, but will be glad you have it in the event it is needed. Put options can provide good protection if you think that it’s needed.

Covered calls can be used to produce some extra income and provide limited downside protection. When you sell a call option you are required to deliver the stock by a certain date at a set price. If you don’t wish to deliver you can buy the call option back. Options strategies can be combined in various ways to achieve the goals that you wish to achieve.

Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.