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Split-Strike Conversion

You manage a large equity portfolio and need downside protection without selling your positions. A split-strike conversion applies a collar to the entire basket: buy OTM puts on the index for crash protection, sell OTM calls to finance them. The "split-strike" name comes from the puts and calls being at different strikes, split around the current price.

It's a boring, conservative, widely used institutional hedging strategy. Pension funds, endowments, and insurance companies run variations of this every quarter. Returns are bounded: you participate in moderate upside, you're protected from severe downside, and the net cost is near zero.

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A real split-strike conversion produces variable, market-correlated returns within a band. If someone offers you consistent double-digit returns from a collar strategy, they've either discovered perpetual motion or they're lying.

What You Do​

The Setup
Ownbasket of stocks (e.g., S&P 100 constituents)
BuyOTM puts on the index (downside protection)
SellOTM calls on the index (finances the puts)
Max Profit
Capped at call strike
Max Loss
Floored at put strike
Net Cost
Often near zero
Range
Put strike to call strike

How It Works​

This is mechanically identical to a collar. The only difference is that it's applied to a diversified basket rather than a single stock, which reduces the basis risk between the options (typically index options) and the underlying holdings.

  1. Below the put strike. Losses floored. The puts protect the portfolio.
  2. Between strikes. You capture the basket's returns within this range. Up market, you participate. Down market, you feel it. This is where a real split-strike lives.
  3. Above the call strike. Gains capped. The short calls offset further upside.

When It's Used (Legitimately)​

  • Pension funds and endowments that need to protect large equity portfolios while generating some upside participation
  • Insurance companies managing regulatory capital requirements
  • Wealth managers offering principal protection products to clients
  • Any institution that needs a bounded risk/return profile on a large equity portfolio

The split-strike conversion is a perfectly sound, deeply boring strategy. It protects against crashes and gives up upside to pay for the protection. It should produce low-volatility, market-correlated returns within a band. If someone is offering you consistent double-digit returns from a collar strategy, they're either lying or they've discovered perpetual motion.

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