As a busy corporate executive, you may not be able to find the time to manage all the elements of your financial life. Sizeable stock or options holdings in conjunction with regulatory and contractual restrictions may make it difficult to diversify effectively. At J.P. Morgan Securities, we understand the complex challenges faced by corporate executives. We can work with you to hedge single-stock risk, diversify within parameters acceptable to you and your company and help you minimize tax implications.
Planning for Restricted and Control Stock
Concentrated stock positions expose you to higher degrees of risk and portfolio volatility, which may lower your compound returns over time. Your J.P. Morgan Securities Financial Advisor can help balance your liquidity needs and risk tolerance through appropriate diversification, allocation and hedging practices within the regulatory parameters governing restricted and control securities.
We can help you develop an appropriate strategy based on your total financial picture, with the ultimate goal of minimizing volatility and optimizing long-term results. You may be able to utilize one or more of the following strategies to help reduce the single-stock risk that results from concentrated stock positions:
- Collateral Loans allow you to raise capital by pledging concentrated securities, putting your idle assets to work without selling them and avoiding a taxable event.
- Zero-cost Collars, also called cashless collars, use customized over-the-counter “put” and “call” combinations with the objective of creating a floor and ceiling to help protect against losses, defer taxes and allow participation in a portion of the upside if the stock price increases.
- Variable Prepaid Forward Contracts are structured as prepaid sales, allowing you to monetize a portion of your position so you can use those funds to diversify while deferring capital gains and participating in a portion of the upside if the stock price increases.
Navigating Regulatory Requirements
Corporate insiders are subject to SEC rules that can make it difficult to diversify or liquidate their corporate holdings. J.P. Morgan Securities offers expertise in executing transactions for individuals subject to SEC rules and can help you comply with complex regulatory requirements.
- Rule 144 Transactions – We can help corporate insiders and affiliates sell their restricted and control shares and assist with the 144 compliance process.
- Rule 10b5-1 Trading Plans – Your Financial Advisor can implement a trading plan that is designed to create an affirmative defense while increasing your trading opportunities.
Optimizing your Stock Options
If you hold a significant amount of corporate stock options, we can help you develop a liquidation strategy to optimize their value. Your Financial Advisor can evaluate your vested and unvested stock and options (both qualified and non-qualified), as well as your other holdings in a particular issuer, to determine the before- and after-tax impact, which tranches are the most price sensitive and determine the order in which you should liquidate them.
The investment strategies outlined in this report involve inherent risks and are not appropriate for every investor. Some or all of the strategies may involve transactions in derivatives, including futures and options. Use of derivative instruments, consisting of futures, options, options on futures, and swap agreements, for hedging purposes or as part of an investment strategy, may involve certain costs and risks, including the risk that an account could not close out a position when it would be most advantageous to do so, the risk of an imperfect correlation between the value of the securities being hedged and the value of the particular derivative instrument, and the risk that unexpected changes in interest rates may adversely affect the value of an account’s investments, in particular derivative instruments. Further, the execution of multiple transactions, including multiple leg option strategies, may cause you to incur additional costs, such as multiple commission charges. You should refrain from entering into such transactions unless you fully understand the terms and risks of the transactions, including the extent of your potential loss, which can be equal to, or in certain instances greater than, the full amount of your initial investment. Your counterparty in an OTC transaction would be the Firm or an affiliate of the Firm.
The discussion of loans or other extensions of credit in this material is for illustrative purposes only. No commitment to lend by J.P. Morgan should be construed or implied. If using securities as collateral, it is important that you understand fully the risks involved. Leverage is not suitable for all investors. You should examine your investment objectives, financial resources, and risk tolerance to determine whether the use of leverage is appropriate. The securities in your account are the Firm’s collateral for the loan. If the securities in the account decline in value, so does the value of the collateral supporting the loan. Should that happen, you may be required to pay down the loan or deposit additional securities as collateral. If you cannot do so, all or a portion of the collateral may be liquidated and a potentially taxable event may occur. A payment default may result in the loss of the pledged securities. The complete description of the loan terms are contained in your customer agreement; read it carefully prior to engaging in any transaction.