Collar Advance: A Simpler Approach to Prepaid Variable Forward Contracts

What is a Collar Advance?

A Collar Advance is a financial contract that lets large stockholders unlock liquidity today while deferring the sale (and taxes on gains) to the future. It uses a collar strategy, discussed in more detail below, to reduce downside risk (and preserve upside potential), often making an underwriting bank more comfortable lending against the stock. This also means investors can access cash at typically lower rates than standard margin loans on stock.

There are two parts to the transaction: the collar and the cash advance. That’s why we prefer “Collar Advance” to other names to describe this type of transaction. They include product names (some of which are proprietary) like:

• Variable Prepaid Forward Contracts (VPFs)
• Prepaid Variable Forward Contracts (PVFs)
• PRiSM 

The Collar: A collar is a well-known hedging strategy to limit downside risk on a stock investment. Typically, investors buy a protective put option that protects them on the downside at a floor price. To offset this cost, a call option is sold on the same stock, which limits the upside participation. In a typical collar advance transaction, you can choose the downside protection, typically between 70% - 90%, and the upside cap is calculated for that particular stock. 

For example, your stock is trading at $100 and you are looking to borrow against it. You choose 80% downside protection, and put options are purchased at $80. However, buying this protection can be costly. To offset the cost, call options are sold, creating a zero-cost collar and setting an upside cap. Let’s say the market conditions indicate a $160 cap and a two-year term to create a zero-cost collar; then this setup is known as an “80%-160% two-year collar”.

Cap:  The “cap” is the maximum upside participation you have in your stock's growth during the contract's term. The cap limits your potential profits in exchange for downside protection.

Floor: The "floor" is the price level below which you are shielded from further loss in value. In essence, the floor limits your potential losses to the floor percentage, typically 70% - 90%.

Term: A collar advance is a fixed-term instrument, and in this example, we illustrate a two-year term for the contract.

The Advance: Once the collar is set, the underwriting bank can lend you $80 since the collar offsets any loss in stock value below $80 for the next two years. Assuming the collar is costless, the bank will advance you the $80, less the prepaid interest over the term. This upfront cash is the “advance” or “prepaid” part of a Prepaid Variable Forward Contract. In return, you agree to settle the contract by delivering some variable amount of your stock (or the cash equivalent value) to the bank at the end of the term—that’s the “forward” component.

Note, however, that you can settle at maturity in a few different ways, depending on where the stock price ends up after two years: 

• Below $80 (floor): Deliver all pledged shares with no additional obligation OR pay back the $80 loan amount in cash.
• Between $80-$160: Deliver enough shares to cover the $80 loan OR pay back the $80 loan amount in cash.
• Above $160 (cap): Deliver enough shares to cover the $80 loan at $160 OR pay back in cash the $80 loan amount PLUS deliver the difference between $160 and the current stock price in additional shares or cash.

You can use the Collar Advance proceeds for any purpose, including:

• Bridge financing for a purchase and sale of real estate
• Investing in a diversified portfolio
• Funding a long/short strategy to generate tax losses
• Starting a company
• Exercising stock options
• Paying a tax liability

It’s also important to note that the structure of the Collar Advance transaction gives you liquidity without triggering a taxable event upfront. Capital gains taxes can be deferred until you settle by delivering shares or settle the loan with cash.  You may also be able to continue deferring gains by rolling the contract forward if it is structured correctly. However, guidance from a qualified advisor is crucial.

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How does a Collar Advance work?

While the Collar Advance process may seem complex, let’s examine an example to understand each step. 

Let’s say that you’re a longtime Microsoft employee and you’ve accumulated 50,000 shares of Microsoft stock worth $100 each. Your stock is worth $5 million; however, your average cost basis is $25 per share, so selling the stock would mean paying taxes on $3.75 million of capital gains, leaving you with far less liquidity than you’d hoped.

Here’s what might happen if you decide to use a Collar Advance instead:

1. Indicate your interest 

You or your advisor will contact a provider to express your interest in a Collar Advance (or a “prepaid forward contract,” as they’re likely to talk about it). They’ll want to know the size of your concentrated stock position, desired advance amount, timeframe, and possibly how much floor protection you’re interested in. Typically, these transactions have minimums of $5M to $10M, while firms like Cache are making them more accessible with minimums as low as $1-2M. In this case, your $5M in MSFT stock and your long-term investment outlook may be a great fit.

2. Review proposals with different terms 

You review proposals with different term lengths, levels of floor protection, and advance amounts. You can choose whichever option you’re most comfortable with, or you can decide not to participate.

In this example, let’s say you and the counterparty bank underwriting the contract agree to a two-year collar structure with an 80% downside floor and a 160% upside cap, which means you can borrow up to $4M by pledging your stock.

3. Execute the transaction

Once the agreement is signed, you’ll open an account and transfer your shares to the underwriting bank, where they’ll be held for the loan term. With the Collar Advance, we partner with banks that use synthetic collars rather than the traditional method of buying a put and selling a call to achieve greater tax efficiency.

4. Receive your advance in one lump sum payment

As soon as everything is set up, you’ll receive liquidity via a single payment. When structured correctly, no taxes are owed on this payment, and you’re free to use the funds however you choose.

All the interest expenses and fees for the Collar Advance are deducted from the advance you receive, so you won’t have any out-of-pocket costs for the rest of the term. For example, if the implied interest expenses and fees amount to 6% over a two-year term, you’ll receive 74% in liquidity. For the $4M loan amount, this would equal to $3.7M in liquidity. The actual implied interest could differ based on market rates at the time of your Collar Advance.

What happens at maturity of the Collar Advance?

At the end of the term, there are three possible outcomes based on where the share price stands relative to the cap and floor:

This illustration describes the different parts of a collar advance. Prices, caps, floors, and advances can vary, but the numbers here describe the hypothetical that’s discussed in this article.

If the stock price is between the cap and the floor at the end of the term, you’re likely in the most favorable scenario. You owe enough stocks to cover your initial loan amount at the current stock price, which means you are able to capture the appreciation above $100. The remaining stocks are returned to you. Or, you can settle the loan in cash to receive all your stocks back.

Tip: For any outcome where the share price is above the floor at the end of the term, the collar advance can generally be "rolled over" easily - and capital gains deferred further - under renewed terms for the advance.

If the closing price is above the cap, you would still owe enough stocks to cover the advance at the $160 price. For example, if MSFT is trading at $200, you would still owe enough stocks to cover the $4M loan at the $160 level. This is because the “call” leg of the collar caps upside participation at $160, and starts losing value after the stock price crosses $160. 

Tip: You can also settle with cash by paying back the loan amount, plus the appreciation amount above the $160 cap.

If the price is below the floor, you deliver all of your pledged stocks to cover the advance with no additional obligation, even if the stock has cratered in value. You are protected from any stock movement below the floor price, and the transaction is complete irrespective of stock price. You can also settle in cash to receive your shares back.

The bottom line? If your Microsoft stock stays above the floor price, a collar advance will offer greater flexibility at maturity. You can deliver shares at market prices, close out the transaction with cash, or extend the advance with a rollover if the transaction is structured appropriately. However, it is important to work with your tax advisor to ensure you do not inadvertently create a taxable event. If you deliver any shares, capital gains taxes will be due at that point.

As the above illustration shows, a collar advance generally makes sense when one is bullish on the stock. However, if one is not excited about the stock's long-term prospects, selling it right away might be the most effective option.

Benefits of a Collar Advance

In addition to liquidity, a Collar Advance provides several distinct benefits:

Typically lower borrowing rates

The implied interest rates charged on collar advances are typically very competitive. Collar advance rates can be substantially cheaper than a line-of-credit or a margin loan from brokerages. This can save you significant interest expenses over the term of the advance. Note, however, that the interest expense from a collar advance is not tax deductible. However, any loss would adjust your basis for the shares.
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Collar Advance rates can also be substantially cheaper than a traditional mortgage loan, providing the necessary cash to purchase a home outright and refinancing to a traditional mortgage in more favorable interest rate environments. See a comparison of current rates to understand your options.

Downside protection with floor

The built-in protection (floor) against downside risk limits your maximum loss if the share price drops. Unlike a traditional margin loan, you will not receive a margin call if the share price drops suddenly, nor do you have to worry about managing collateral to meet these margin calls.

This floor can provide greater potential comfort, especially when borrowing against a concentrated stock position and investing in assets that cannot be readily liquidated (like a real estate investment).

Tax deferral

Collar Advance allows capital gains taxes to be deferred until shares are eventually sold. This tax deferral lasts for the duration of your initial term and if available, any subsequent extensions, as long as they are structured appropriately. 

Taxes on capital gains can be very expensive – if you’re in the highest tax bracket, they range from 23.8% to 38%, depending on where you live. Collar advances let you delay this tax liability – and avoid the impacts of tag drag on your portfolio.

Retain ownership rights

As we’ve mentioned, you continue to participate in the success of the stock if it gains value. During the collar advance term, you keep your voting rights and continue receiving dividends. However, dividends change from qualified to non-qualified and become taxable at ordinary income rates.

Retaining ownership rights can help reduce the “seller’s remorse” many investors feel when they move out of a concentrated position.

No margin calls or forced sales

Many alternatives, like margin loans, either require shares to be permanently sold or additional collateral (more securities or cash) to be deposited if the stock you borrow against declines excessively. The floor on your collar advance removes the forced sale risk – and you still get to generate liquidity.

Flexibility in usage of funds

There are no restrictions on how the liquidity raised via a collar advance is used. The cash infusion can be deployed wherever you choose – which means you can make big purchases, pay off debts, do good for the world, or just enjoy yourself more. 

The flexibility may be advantageous over alternatives like margin loans, which may often only be used for investing.

Risks and other considerations

All investments carry some risk, including the loss of principal. Collar Advances are no exception. Here are some of the things you’ll want to consider before participating:

• Opportunity cost of capped gains: The upside cap limits potential gains if your shares appreciate substantially. It means you have to forego additional profits above the cap price when you settle the contract. You should weigh this opportunity cost carefully – especially if you’re optimistic about your stock’s potential within the term of the contract. For example, if you have a 160% cap over a two-year term, you wouldn’t participate in the upside if the stock appreciates more than 60% over the next two years.
• Loss up to floor price: Although the floor price limits your maximum loss, you can still face some losses below your stock’s market value at the start of the contract. The downside risk is limited to the floor – but it’s not fully eliminated. 
• Early exit considerations: As a structured product, a Collar Advance requires a predetermined term commitment, typically one to three years. Exiting early usually involves terminating the options contracts that create the collar – often at unfavorable prices, which could expose you to sizable costs.
• Dividend tax rate impact: Dividends on the shares you pledge switch from being qualified dividends to non-qualified dividends. This switch means you’ll pay ordinary income tax on dividends during the term of the Collar Advance instead of the lower capital gains taxes you’re used to paying for a qualified dividend. 
• Complex structure: Collar Advances involve complex derivative transactions - many investors might not be familiar with these derivative structures. Before participating, you should thoroughly understand the structure or seek advice from professionals who understand it.
• Significant minimums: Since these are bespoke transactions, the minimums to cover the cost of operations might be significant. We typically see minimums range in $1M - $3M depending on the stock.
• Repayment risk: At the end of the predetermined term, the contract must either be repaid or, if market conditions permit, rolled forward. It is crucial to ensure you have sufficient liquid assets to settle the loan in cash if necessary. This is especially important for any assets up to the floor amount discussed above.
• Tax risk:  Tax treatment of Collar Advances is complicated, and it is important to have qualified tax advisors assisting you with the process.

How much liquidity can you raise with a Collar Advance? 

The amount of liquidity that can be generated through a Collar Advance depends on two primary factors:

1. Floor Price: The floor price sets the lower limit for the contract and directly impacts the maximum cash that can be raised. Floors are typically between 70% and 90% of the current market value. 
2. Cap Price:  The cap price is usually set up to offset the cost of the floor, in which case the collar has zero cost.  If you want a higher cap for the same level of protection, that will reduce the Collar Advance rate.
3. Interest Rates: The implied interest rates are the difference between the market value at the beginning of the transaction and the cash advance you receive. That interest is capitalized upfront, which reduces your net liquidity. Unlike stock loans driven by effective federal funds rates, these fixed rates move in tandem with treasury rates for particular terms.

Higher interest rates mean you’ll have greater capitalized costs upfront, and you’ll receive a smaller advance as a result.

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*Tax rates included both federal and state taxes in high-cost-of-living states like New York and California, and they were pulled from taxrate.com as of March 2025.

Comparing a Collar Advance to some alternatives

When evaluating liquidity options for concentrated stock positions, Collar Advances can offer a strong combination of benefits relative to some alternatives:

• Attractive fixed rates below comparable financing options
• Built-in downside protection through floor prices
• Tax deferral on monetized position for multi-year terms
• Avoiding forced sales, liens, or unnecessary collateral risk
• Customization to individual risk preferences

However, collars are also not without risks and limitations. Consult with a registered investment advisor and/or tax specialist to make sure you understand all the implications for your particular situation. That said, here’s a rundown of some alternatives to gaining liquidity through a Collar Advance’s variable prepaid forward contract structure.

Margin loans

Most brokerages offer margin loans that let you borrow money by pledging your stocks as collateral. Under Regulation T, you can typically borrow up to 50% of a security’s value, although many firms will reduce the amount you can borrow, particularly for volatile securities. The interest rate is generally variable, often 2%-6% above the Secured Overnight Financing Rate (SOFR = 4.40% as of April 8th, 2025*).

While this approach can provide quick liquidity and boost your purchasing power, it comes with significant downsides:

• Margin Calls: If your stock’s value drops, you may have to deposit more money or sell shares. This can be risky if you’ve borrowed against a concentrated position.
• Forced Liquidation: If you can’t meet the margin call, your broker can sell your securities—often at unfavorable times.
• Restricted Use: Most margin agreements restrict how the loan is used, with some requiring borrowed funds to remain at the brokerage for investments only.
• No Downside Protection: There’s no built-in safety net if your stock loses value.

Securities-Backed Lines of Credit (SBLOCs)

Similar to margin loans, SBLOCs let you borrow money by pledging your stocks as collateral, but they are governed by Regulation U and offered by both banks and brokerage firms. Under Regulation U, lenders typically allow borrowing between 50% and above of the collateral's market value, depending on their policies and the nature of the pledged securities. SBLOC interest rates usually follow benchmark rates such as SOFR, with spreads typically between 1% and 4% above the benchmark, influenced by the borrower's relationship with the institution and the amount of collateral pledged.

Advantages of SBLOCs include:

• Flexible Use of Funds: Borrowed funds can generally be used for a wide range of purposes, including personal expenses, real estate, business investments, or other financial needs beyond securities investments.
• Potentially Better Stability: SBLOCs may offer somewhat greater flexibility in managing collateral compared to margin loans, though liquidation risks remain if maintenance requirements are not met.

However, SBLOCs also carry significant risks:

• Risk of Maintenance Calls: If the value of your pledged securities significantly declines, lenders can issue maintenance calls requiring additional collateral. Failure to comply may result in forced liquidation of your securities.
• Interest Rate Risk: SBLOCs typically feature variable interest rates, which could increase borrowing costs significantly if benchmark rates rise.

Who are Collar Advances for? 

Collar advances are for investors with a long-term outlook who hold a concentrated position in a single stock. Here are some important factors for understanding your eligibility and deciding whether a collar advance aligns with your goals:

1. Concentrated Stock Position Size: Collar Advances require meaningful stock holdings, usually at least $1 million in a single name. 
2. Expected Term of Ownership: The multi-year holding requirement often suits investors with long-term conviction in their stocks. Are you comfortable remaining invested for one to five years?
3. Market Outlook: How bullish are you on the short and long-term upside of your stock? The caps limit how much you’ll benefit from substantial rallies, but there can still be quite a bit of potential upside. Collars can be a good fit if you have a moderately optimistic outlook. 
4. Major Capital Needs: Collar Advances make sense for investors seeking sizable liquidity for purchases, investments, or business needs. Smaller borrowing needs can be met through other types of loans.
5. Tax Considerations: The tax deferral and dividend impacts should be reviewed with a tax professional. High-income earners may face greater burdens from non-qualified dividend treatment, for example.
6. Risk Tolerance: Although risks are moderated, collars still carry complexities and the possibility of loss up to the floor. You need to be comfortable with their sophisticated financial structure.

While not appropriate for everyone, their distinct advantages can make Collar Advances a compelling tool for getting liquidity from your concentrated stock position. It’s worth taking a little time to evaluate your circumstances and make sure a Collar Advance fits within your overall outlook.

Getting started with a Collar Advance

At Cache, we bring them to more investors while making it easy and transparent. If you’d like to learn more, look at what we offer, or tell us about yourself and the stock you’d like to borrow against to see if we can help.

<div class="blog_disclosures-text">Capital gains tax includes federal long-term capital gains, which range from 0-20%, NIIT at 3.8%, and state capital gains, which range from 0-13.3% depending on the state. Local capital gains tax might also apply, depending on your residence.</div>

<div class="blog_disclosures-text">Any products discussed herein may be purchased only after a client carefully reviews each product's offering materials. Cache has not considered any individual investor's actual or desired investment objectives or goals. Cache does not make investment recommendations or assist in determining if an investment is appropriate for investors; they are responsible for working with a financial professional to determine if the products are suitable for their specific situation or determining that the product is suitable before investing.</div>

<div class="blog_disclosures-text">Collar Advance relies on a fixed-term options contract that may be difficult to unwind in volatile markets. Investors may face potential losses when prematurely exiting contracts, particularly during challenging or unfavorable market conditions. Although Collar Advance offers certain downside protections, investors may still face absolute losses if share prices decline over time. In addition, investors risk foregoing gains beyond the cap levels set in the contracts. Dividends received on stocks pledged under Collar Advance contracts are not considered qualified dividends and may not receive preferential tax treatment.</div>

<div class="blog_disclosures-text">Cache Securities LLC Member FINRA/SIPC does not have a direct client relationship with any clients interested in Collar Advance or directly make available any of the products needed to facilitate a Collar Advance. They offer the service in partnership with Fort Point Capital Partners LLC (“Fort Point”), an SEC Registered Investment Advisor, and Uhlmann Price Securities, Member FINRA/SIPC, all unaffiliated companies, for which Cache Securities receives a referral fee.</div>

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