How to Hedge RSUs with Options: A Practical Guide

You work at a tech company. A big chunk of your net worth is in your employer's stock. RSUs vested, maybe more coming. You believe in the company long term.

But you also know that having 40%, 60%, or 80% of your wealth tied to one stock is risky. If the stock drops 30% — and every stock eventually does — your financial life takes a serious hit.

The obvious solution is to sell. But selling triggers taxes, might violate company policy during blackout windows, and feels wrong when you are still bullish on the business.

Options give you another path. You can protect your downside without selling a single share.

Why Concentrated Positions Are Dangerous

Diversification is boring advice that happens to be correct. History is full of employees who were overweight one stock and paid the price.

The math is simple: if 60% of your net worth is in one stock and it drops 50%, your total net worth drops 30%. That is years of savings and career earnings gone, not because you made a bad decision, but because you did not hedge a known risk.

This is not about being bearish on your company. It is about acknowledging that you already have massive exposure through your salary, future RSUs, career trajectory, and professional network. All of that is correlated with the stock price. Adding a concentrated stock position on top makes the concentration even worse.

Strategy 1: The Collar (Zero-Cost or Low-Cost Protection)

The collar is the most popular hedging strategy for RSU holders, and for good reason. It can cost little or nothing.

How It Works

You own 1,000 shares of your company at $150. You want to protect against a big drop without paying a fortune.

• Buy a put option at $135 (10% below current price) — this gives you the right to sell at $135 no matter how far the stock falls
• Sell a covered call at $170 (13% above current price) — this generates premium to offset the put cost, but caps your upside at $170

If the put costs $4.00 and the call generates $4.00 in premium, you have a zero-cost collar. You gave up gains above $170 in exchange for guaranteed protection below $135.

The Tradeoffs

Your outcomes at expiration:

• Stock below $135: Your put protects you. Max loss is $15 per share (from $150 to $135), not whatever the stock actually fell to.
• Stock between $135 and $170: Both options expire worthless. You keep your shares and the full gain or loss.
• Stock above $170: Your shares get called away at $170, or you buy back the call at a loss. Either way, your upside is capped.

The key decision is where to set the strikes. Wider collars (lower put strike, higher call strike) cost less but provide less protection. Narrower collars give better protection but cap more upside.

Choosing Your Strikes

A common approach:

• Put strike 8-12% below current price (enough cushion to avoid triggering on normal volatility)
• Call strike 12-20% above current price (enough room for reasonable appreciation)
• 3-6 month expiration (balances cost with protection duration)

Check implied volatility before setting up a collar. When IV is high (after a drop or before earnings), puts are expensive and calls are expensive too — you can sell a closer call to fund a better put. When IV is low, the opposite applies.

Strategy 2: Protective Puts (Simple but Costs Money)

If capping your upside is not acceptable, the protective put is simpler.

You buy a put option on your shares. Period. If the stock drops, the put gains value and offsets your losses. If the stock rises, you keep all the upside minus the premium you paid.

The Cost Problem

Protective puts are insurance. Insurance costs money.

For a $150 stock, a 3-month put at $135 might cost $4.00 per share. That is $4,000 for 1,000 shares. Over a year, rolling that protection four times costs $16,000 — roughly 10% of the position value.

That is expensive. But if the stock drops 40%, you saved $44,000 (the difference between $135 and $90 on 1,000 shares, minus the $16,000 in premiums).

When Protective Puts Make Sense

• You are very bullish and do not want to cap upside
• You need short-term protection (specific event like earnings or a lockup expiry)
• The cost is small relative to the risk you are hedging
• Your company's IV is low, making puts cheaper

For ongoing protection, protective puts get expensive. The collar is usually the better choice for long-term hedging.

Tax Considerations: Do Not Skip This Section

Options hedging on employer stock comes with tax landmines. The biggest one is the constructive sale rule.

What Is a Constructive Sale?

The IRS says that if you take a position that eliminates virtually all risk and reward on an appreciated stock, you have effectively sold it. That triggers capital gains tax even though you did not actually sell shares.

A very tight collar — say buying a $148 put and selling a $152 call on a $150 stock — looks a lot like a sale to the IRS. You have locked in a $4 range. That is a constructive sale.

How to Stay Safe

• Keep your collar wide. Most tax advisors suggest the put should be at least 10-15% below current price and the call at least 10-15% above.
• Avoid collars where both strikes are close to current price.
• Do not use the same expiration as your anticipated holding period. If you plan to hold for a year, do not buy a 12-month collar that expires on the same date.
• Talk to a tax advisor. This is not a place to guess. The constructive sale rules are nuanced and the penalties are real.

Protective puts alone generally do not trigger constructive sale issues because you still have unlimited upside exposure.

When to Hedge

Timing matters. Here are the highest-priority moments:

Before Earnings

Your company's earnings report is the single biggest risk event for your stock each quarter. If you are going to hedge, do it before the announcement — not after.

The catch: options get more expensive before earnings because IV rises. You are paying more for protection exactly when you need it most. A collar helps here because the elevated IV also makes the call you sell more valuable.

Lockup Expiry

If your company recently IPO'd and you are approaching lockup expiry, that is a high-risk moment. Supply of shares is about to increase dramatically, and the stock often drops. Hedging before lockup expiry is one of the clearest use cases for protective puts.

When Your Concentration Gets Extreme

Set a personal threshold. If your company stock exceeds 25-30% of your liquid net worth, start hedging regardless of your outlook. The risk is not about your opinion of the company. It is about position sizing.

How StockShield Helps

Evaluating collar and put strategies across different strikes, expirations, and cost scenarios takes time. Our StockShield tool simplifies this.

It shows you:

• Pre-built collar configurations at different protection levels
• Net cost (or credit) for each setup
• Maximum downside exposure and upside cap
• How IV levels affect pricing for your specific stock

Instead of manually pricing puts and calls across dozens of combinations, you get a clear view of your hedging options in seconds.

A Practical Hedging Plan

If you have a concentrated RSU position, here is a straightforward approach:

1. Assess your concentration. What percentage of your net worth is in this one stock?
2. Decide how much to protect. You do not have to hedge everything. Hedging 50% of your position is much better than hedging 0%.
3. Choose your strategy. Collar for cost-efficient ongoing protection. Protective put for event-specific risk.
4. Set wide strikes. Stay well clear of constructive sale territory.
5. Use 3-6 month expirations. Roll as needed.
6. Review quarterly. As your stock price changes, your strikes may need adjusting.

The Bottom Line

Your employer stock is already your biggest bet. Your career, your future RSU grants, and your professional network all depend on the same company. Adding a concentrated stock position on top of that is compounding risk, not diversifying it.

Options let you keep your shares while putting a floor under your losses. It is not free — you pay in premium or capped upside — but that cost is small compared to the wealth destruction of an unhedged concentrated position.

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This is analysis, not advice. Consult a qualified tax advisor before implementing hedging strategies on employer stock. We help you understand the landscape — you make your own decisions.