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Minyan Mailbag: Clarity on "Collar" Transactions

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the collar transaction is not considered a taxable event until it is terminated.

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Prof. Succo,

I recently had the pleasure of hearing how a major holder (a 13G filer) of a publicly traded security (which shall go unnamed -- security and individual) protects his "position" via buying a put(s) and selling a call(s) -- "collaring" the stock position. It was quite obvious that the money manager or financial adviser handled this transaction because the individual was not very knowledgeable about the structure of the transaction and other things that I had asked.

My questions are as follows:

1) As an aside, I don't know why these transactions are not required to be filed with the SEC like the 13G. It seems like they should. Do CEOs do this too?

2) Transactions not done in listed option / exchange. Are AIG (AIG) or Wall Street firms major participants in these types of transactions?

3) I know this is a wide open question, but are these done "at the money?" Is the put protection usually a % move away from the agreed upon strike? I guess the question is, are these types of transactions done similar to what one might expect at, say the CBOE? And, would these be done for a net debit, credit, or just zero out? Are there fees for this? Usually a %?

Regards,

Minyan JTO

MJTO,

1) A 13G filer is over 5% but less than 10%, and is someone who does not have influence or control over the company. 13G filers DO NOT need to disclose each collar transaction; they only need to disclose change of overall positions at the end of each calendar year. Assuming they hold freely-tradable stock (which they likely do, unless they acquired in a private transaction), they also do not need to file a Form 144 or have their securities registered to enable the counterparty to hedge. So for a 13G filer, it's a very easy, quiet transaction.

For a true affiliate (a 13D holder, which means over 10% or someone less than 10% who exercises some control over the company), they would need to both disclose as of the first day of hedging with a Form 13D/A and either file a Form 144 to sell pursuant to the Rule 144 exemption, or have a registration statement that they sell under. They also would need to be sure they had no material non-public information, so they couldn't hedge right before earnings releases, if anything major was happening in the company, etc.

2) Collar transactions are normally done over the counter where the collar is imbedded inside of a loan made to the third party. In this way they receive cash as if they sold the stock, but the collar transaction is not considered a taxable event until it is terminated. Normally this is done with a large broker dealer. This activity I have written about extensively describing these types of trades as the largest profit maker for dealers all through the 1990's.

3) Normally these collars are struck with the call out of the money, allowing some upside participation from current levels, and the put struck out of the money as well, leaving some risk. It is the fact that there is some risk left that makes the collar a non-taxable transaction. There are subjective rules (tests) determining the least amount of risk allowable before it is taxed (considered a forward sale).

-Succo
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No positions in stocks mentioned.

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