Last week, we explored Delaware Statutory Trusts (DSTs) and how they allow real estate investors to defer capital gains taxes while generating passive income. This week, we’re shifting gears back to the stock market and diving into a sophisticated strategy that high-net-worth investors use to protect their portfolios and enhance returns—Options and Option Overlay Strategies.

When most people hear the word options, they think of speculation or risky trading. However, options can also be used as a risk management tool to protect your portfolio without selling your investments or triggering capital gains taxes. These strategies are commonly used by experienced investors and institutions to create more predictable returns.

What Are Options?

Options are financial contracts that give an investor the right—but not the obligation—to buy or sell a security at a predetermined price within a set timeframe. They are used for two main purposes:

• Hedging Risk – Protecting investments from potential losses.
• Generating Income – Enhancing returns through premium collection.

For high-net-worth investors, a collar strategy is one of the most effective ways to limit downside risk while keeping a portfolio intact.

How the Collar Strategy Works

A collar strategy is a risk management approach that protects your investments from major losses while keeping capital gains taxes deferred. It consists of two components:

• Protective Put – This acts as a form of insurance, allowing you to sell your asset at a predetermined price if the market drops.
• Covered Call – This generates additional income by selling an option on your stock, which helps offset the cost of the protective put.

By combining these two elements, the collar strategy limits downside risk while also capping upside gains.

Why This Matters for High-Net-Worth Investors

As you approach retirement, portfolio protection becomes just as important as growth. Selling investments to reduce risk can trigger significant capital gains taxes, leaving you with less money to invest.

Using an option overlay strategy allows investors to:

• Preserve principal while still participating in market growth
• Reduce risk without selling assets or realizing taxable gains
• Generate additional income in a tax-efficient way

For investors with appreciated assets, collars and other option overlays can be a powerful tool to smooth returns and limit volatility without disrupting long-term financial plans.

Potential Risks and Considerations

Option strategies require expertise and ongoing management. Key risks include:

• Limited Upside – Gains are capped in exchange for risk protection.
• Market Timing Risks – Poor execution can lead to lost opportunities.
• Complexity – Options require knowledge and experience to use effectively.

Because of these factors, options should only be used by sophisticated investors or with the guidance of a professional.

Key Takeaways

Option overlay strategies provide a way for high-net-worth investors to protect their portfolios, manage risk, and generate income without making drastic changes to their holdings. By using tools like collars, covered calls, and protective puts, investors can reduce downside exposure without triggering capital gains taxes.

Next week, we’ll explore Opportunity Zones—government-incentivized investments that offer significant tax benefits for long-term investors. Don’t miss it!

Warmly,

Jeff Perry

Partner, Quest Commonwealth

Co-Host of Safe Money Mindset TV Program

Author of Safe Money Mindset – Available on Amazon or DISCOUNTED HERE

👉 Watch our latest TV episodes of Safe Money Mindset on YouTube

Weekly Tip:

This week, take stock of your investments and evaluate your risk exposure. If you hold appreciated assets but are concerned about market volatility, consider discussing collar strategies or other option overlays with a professional. Managing risk effectively doesn’t have to mean selling investments—the right strategy can provide protection without triggering unnecessary taxes.

Jeff Perry is an Investment Advisor Representative registered with Foundations Investment Advisors, LLC, an SEC-registered investment adviser. Investments include the risk of loss, including the loss of principal. Image shown is hypothetical.