In the world of stock options, a collar strategy protects the equity used by investors as the primary concern to the downside of risk of a stock position. For those willing to put a cap on the upside potential in order to limit their downside risk at little or no cost.
Collars may be of special interest to investors who have one equity position that accounts for a large proportion of their net worth, and who may be able to reduce the size of this position. For these investors, low cost protection may take precedence over maintaining upside potential.
If you have a financial adviser that is in charge of handling the resources of your stock options, it is best to learn the tax options of delay from them. Your financial adviser knows all the tax laws that pertain to each states tax laws.
Taking on the responsibility by one’s self could have drastic over tones if not handled correctly. An equity collar consist of the simultaneous purchase of a put option, and the writing of a call option.
Both options are out of the money, and usually have the same expiration date. Most often a collar is established against an existing equity position, with one put purchased and one call written for every 100 shares held. It is also possible to establish a collar at the same time an equity position is purchased.
Investors that have an IRA account can delay the tax man, by keeping their money tied up in an investment position. By having dividends reinvested to build on stock options later. The IRS can not touch the money of an IRA till you draw money from it. A ten percent penalty usually applies if you take money out of your IRA account early.
If you draw money off the account of your IRA, in the form of dividend checks each month instead of having them automatically reinvested. You only have to pay taxes on the amount over 1500.00 dollars. That is when the money is taxable. Any profit made over the said amount is charged to you as income.
It is wise to reinvest your dividends off your stock. The money is tax free until you draw from your account. IRA accounts are nice to have, but they are often over scrutinized by the IRS because of all the red tape it takes to charge an IRA account. Delays are not what the IRS want. You have to protect your investments and your money.
A good financial adviser can help you set up many different avenues to help ensure you are not penalized by the IRS. Mistakes are not a good thing to have happen, when you are a active investor. Unless you are a certified public accountant or tax lawyer should you only attempt to delay paying the tax man. There is a rule of thumb to consider when doing things on your own. Just remember a fool and their money are soon parted.