RSU Hedging for Tech Employees: Protect Your Vesting Shares

You work at a tech company. Over the past few years, your RSU vests have quietly become the largest piece of your net worth. Maybe it is 40% of your portfolio. Maybe it is 60%. Maybe you do not want to think too hard about the exact number.

Then one quarter, the stock drops 25% after earnings. Your net worth takes a hit that dwarfs anything your savings account could absorb.

This is the concentration risk problem. It is the most common financial vulnerability among tech employees, and options give you tools to manage it without triggering a taxable sale.

The Concentration Risk Problem

Financial advisors generally recommend that no single stock exceed 10-15% of your portfolio. Yet tech employees routinely have 30-60% or more of their net worth in their employer's stock.

The reasons are understandable. You believe in the company. You work there and see the product roadmap. Selling feels disloyal or like a lack of conviction. And honestly, it has been working — the stock has gone up.

But concentration risk is not about conviction. It is about math. A single stock has roughly 3x the volatility of a diversified portfolio. A 30% drawdown in one stock is normal. A 50% drawdown is not unusual. And unlike a diversified portfolio, there is no rebalancing to cushion the blow.

When that stock is also your employer, the risk compounds: a severe downturn can threaten your job, your equity compensation, and your savings simultaneously.

When to Hedge

Not every moment demands hedging. But there are specific situations where the risk-reward tilts heavily toward protection:

Before earnings. Your company reports every quarter. If you have significant unvested or recently vested shares, a 15-20% post-earnings drop is a real possibility. Hedging before earnings reduces your exposure to the most volatile week of the quarter.

Around vesting dates. When a large RSU tranche vests, your concentration increases overnight. The day your shares vest is a natural point to evaluate protection.

After a big run-up. If the stock has doubled and your RSU position now represents an outsized portion of your net worth, you have more to lose. Protecting gains is more urgent than protecting a flat position.

Before lockup expiry. If you are at a recently public company, the lockup expiry can bring significant selling pressure. Hedging ahead of that event protects you from the supply shock.

Strategy 1: The Collar (Zero-Cost Protection)

The collar is the most popular RSU hedging strategy because it can be structured at zero cost. You combine a protective put with a covered call on your shares.

Here is how it works with a stock at $200:

• Buy the $180 put (3 months out) for $5.00
• Sell the $220 call (3 months out) for $5.00
• Net cost: $0.00

Your downside is capped at $180. If the stock crashes to $150, you can exercise the put and sell at $180. Your upside is capped at $220 — if the stock rallies past $220, your shares get called away.

For a zero-cost structure, you are trading unlimited upside for defined downside protection. Most tech employees who are hedging — not speculating — find this tradeoff acceptable.

Choosing strikes: The tighter you want your protection, the more upside you surrender. A $190/$215 collar on a $200 stock gives you tighter protection but less room for gains. A $170/$230 collar gives you more room on both sides but less meaningful protection.

For a deeper dive on the mechanics, see the collar strategy guide.

Strategy 2: Protective Puts (Pure Insurance)

If you are not willing to cap your upside — maybe you genuinely believe the stock is heading significantly higher — you can simply buy puts as insurance.

Stock at $200:

• Buy the $185 put (3 months out) for $5.00
• Cost: $500 per 100 shares

This gives you downside protection below $185 with no upside limitation. The tradeoff is cost: you are paying $500 per contract, every three months, for protection. On a 500-share position, that is $2,500 per quarter, or $10,000 per year.

That sounds expensive. But if your RSU position is worth $100,000, you are paying 2.5% per quarter for insurance against a catastrophic loss. Many tech employees spend more on car insurance for a vehicle worth a fraction of their equity.

When puts make more sense than collars: If your stock has high implied volatility, call premiums will also be elevated, making the collar more attractive. But if IV is low, puts are cheap and may be the simpler choice. Check the IV/HV ratio — when IV is low, buying protection is cheaper than average.

Tax Traps to Avoid

RSU hedging has unique tax considerations that can turn a smart hedge into an expensive mistake.

The Constructive Sale Rule

If you buy a put and sell a call at strikes too close to the current price, the IRS may treat it as a constructive sale — as if you sold the stock. This triggers capital gains tax immediately, even though you still hold the shares.

The safe harbor: keep your collar strikes sufficiently wide. Most tax professionals recommend the put strike be at least 10% below and the call strike at least 10% above the current price. A $180/$220 collar on a $200 stock stays safely within this range.

Always consult a tax advisor before hedging RSU positions. The rules are nuanced and depend on your specific holding period and situation.

The 30-Day Holding Requirement

If your RSUs have vested within the last 30 days, selling a covered call against them may affect your holding period for long-term capital gains treatment. Short-term vs long-term rates can differ by 15-20 percentage points, so this matters.

General rule: Wait until shares have been held for at least 30 days before writing covered calls. Protective puts do not carry this restriction.

Wash Sale Complications

If you sell shares at a loss and have active put options on the same stock, the IRS may classify it as a wash sale, disallowing the loss deduction. Be careful when combining selling shares with active hedges.

Cost Comparison: Collar vs Protective Put

For a 500-share position at $200 ($100,000 total value), hedged for 3 months:

Zero-cost collar ($180/$220):

• Cost: $0
• Protection: Below $180 (10% downside)
• Upside cap: $220 (10% upside)
• Maximum loss from current price: $10,000 (10%)

Protective put ($185):

• Cost: $2,500
• Protection: Below $185 (7.5% downside)
• Upside cap: None
• Maximum loss from current price: $10,000 (7.5% drop + $2,500 premium)

The collar is "free" but limits your gains. The put costs real money but preserves unlimited upside. Your choice depends on your conviction about the stock's near-term direction and how much you value keeping that upside open.

How to Evaluate the Setup

The hardest part of RSU hedging is not choosing the strategy — it is deciding when the cost is right. Options pricing changes daily based on volatility, time to expiration, and market conditions.

StockShield is designed for exactly this evaluation. It analyzes the cost of hedging your specific position, compares collar vs put protection costs, and shows you the optimal strike combination based on current pricing.

The tool factors in IV levels so you can time your hedge for when protection is cheapest, rather than scrambling to hedge after the stock has already dropped and puts have gotten expensive.

A Practical Hedging Schedule

For tech employees with ongoing RSU vests, here is a framework:

1. At each vest date: Evaluate your total concentration. If single-stock exposure exceeds 20% of net worth, consider hedging.
2. Before earnings: Review your hedge. If unhedged, put on a collar or buy puts 2-3 weeks before the report when IV has not fully spiked yet.
3. After a 20%+ run-up: Re-evaluate. Your notional exposure has increased. Your strikes from a previous hedge may need rolling.
4. Quarterly review: Check your overall allocation. Sell some shares if you can, hedge the rest.

The Takeaway

RSU concentration is the biggest financial risk most tech employees face, and it is the one they are most likely to ignore — until a bad quarter makes it impossible to ignore.

Collars give you zero-cost protection at the expense of capped upside. Protective puts give you pure insurance at a quarterly cost. Both are better than the default strategy of hoping nothing goes wrong.

Ready to see what hedging your position would cost? Try StockShield to evaluate collar and put protection scenarios for your specific holdings.