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  • Writer's pictureJay Coulter

HEQT - Simplify Hedged Equity ETF

This ETF uses put-spread collars to reduce the volatility of the funds equity exposure.

From the Simplify Website:

The Simplify Hedged Equity ETF (HEQT) seeks to provide capital appreciation by offering US large cap exposure while investing in a series of put-spread collars designed to help reduce volatility.
Equities + put-spread collars have become a popular way to create more conservative, lower volatility equity investments. By deploying a ladder of collars, that expire over 3 sequential months, the fund seeks to create a hedged equity experience that is additionally robust to rebalancing luck.

HEQY Website:

What is a Put-Spread Collar?

A put-spread collar is an advanced options trading strategy that combines a long stock position with a protective put option, a short call option, and a long put option. This strategy is designed to provide protection against significant losses in a stock position while generating income from option premiums and potentially limiting capital gains. Put-spread collars can be an attractive risk management tool for investors who want to maintain exposure to a particular stock but also hedge against downside risk.

The components of a put-spread collar are as follows:

  1. Long stock position: The investor owns shares of the underlying stock.

  2. Protective put option: The investor buys a put option with a strike price slightly below the current market price of the stock. This provides downside protection in case the stock's value decreases significantly.

  3. Short call option: The investor sells a call option with a strike price above the current market price of the stock. This generates income from the option premium and establishes a maximum selling price for the stock.

  4. Long put option: The investor buys a put option with a strike price lower than the protective put option. This helps to finance the cost of the protective put option, thus reducing the overall cost of the strategy.

Put-spread collars can help investors in several ways. Firstly, they provide downside protection by allowing the investor to sell their shares at the higher strike price of the protective put option if the stock price declines. Secondly, the short call option generates income from the premium, which can offset potential losses or add to gains. Lastly, the long put option reduces the cost of the strategy by partially funding the protective put option.

However, this strategy also has its drawbacks. The short call option caps the investor's potential upside, limiting their gains if the stock price rises significantly. Additionally, the strategy can be complex to execute and may require constant monitoring to adjust the positions as needed.

In summary, put-spread collars offer a way for investors to protect their stock positions against significant losses while generating income from option premiums. This strategy can be useful in uncertain or volatile market conditions, but it requires a solid understanding of options trading and may limit potential gains.


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