Collared Option Hedge Product Pooling Mechanism
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Solution Overview
Problem
High-value, concentrated equity investors face challenges in accessing affordable and readily available collared option hedge products due to their complexity and high costs, limiting their ability to manage downside risk and upside potential effectively, especially for illiquid stock positions.
Innovation Solution
A system and method for establishing and facilitating collared option hedge products by pooling assets from multiple participants, allowing for the collection and allocation of demand for these products, enabling more investors to participate in a financial derivative product that combines put and call options to manage risk.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If customized long-term put options are purchased to hedge concentrated equity positions, then downside risk is minimized, but the cost becomes prohibitively expensive
Solution Approach 1:
The patent combines multiple short-term put options into a single long-term hedge structure. By merging several shorter-duration options (e.g., three 3-month options) into one extended coverage period, the system achieves long-term protection at lower total cost compared to purchasing a single customized long-term put option, while maintaining continuous downside risk protection throughout the extended period.
2Loss of energy
If exchange-listed put options are purchased for short-term protection, then cost is reduced, but the duration of protection is insufficient for long-term illiquid positions
Solution Approach 1:
The patent ensures continuous hedge coverage by systematically rolling over short-term put options into subsequent short-term options. This continuous action of renewing protection maintains uninterrupted downside risk management throughout the extended period, effectively providing long-term protection through a sequence of short-term instruments rather than a single long-term contract.
3Device complexity
If collared option hedge products are made available to high-net-worth individuals only, then product complexity and cost are managed, but accessibility to broader investor base is limited
Solution Approach 1:
The patent segments the investor base into different risk tolerance categories (conservative, moderate, aggressive) and provides customized collared option structures for each segment. This segmentation allows the complex hedge product to be adapted to different investor profiles and capital levels, making it accessible to a broader range of investors beyond just high-net-worth individuals while maintaining appropriate risk-management characteristics for each group.
4Loss of energy
If covered call options are sold to finance put option costs, then put option affordability is improved, but upside potential of the stock position is limited
Solution Approach 1:
The patent applies partial action by selling covered call options on only a portion of the investor's stock holdings rather than the entire position. This allows the investor to generate income to offset put option costs while retaining full upside potential on the uncovered portion of the portfolio. The system enables flexible allocation between hedged and unhedged positions, balancing cost management with upside participation.
Data Source
AI summary
New and improved methods and systems for creating collared option financial hedge products enable multiple customers to pool their assets into a single product. In contrast the prior art where such products were ‘tailor-made’ to individual investors, demand is collected across multiple investors and one or more collared option financial hedge products are created. Multiple customers are then permitted to participate in each product. Such hedge products are thus more readily available to a larger group of customers.