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How people like Bill Gates , who has the bulk of their wealth tied up in MSFT shares, hedge their downside risk in case the share price tanks?

If he were to buy put options like the rest of us, it would get pretty expensive real quick.

Do they get something like free put options?

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  • Why do you say that Bill Gates has his wealth tied up in MSFT? He has been gradually selling his shares for years. Are you just saying that he couldn't close his position quickly without driving down price? – Daniel Lubarov Apr 8 '15 at 0:47
  • Bill gates is just an example. I mean people in general with a lot of money I company shares...like CEO of banks – Victor123 Apr 8 '15 at 1:25
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People with large positions are incentivized to make the company better and can also sell shares at intervals.

Even corporate raiders like Carl Icahn accumulate large shares, and attempt to change the company direction so they can sell at a higher price.

The above two groups have lots of cash and have a diversified portfolio.

Long time employees with positions that are a large portion of their net worth can typically sell calls over their stock to get additional income. Although there is a HUGE knowledge gap amongst this class of people, this group is typically married to their position and will pay extra to print out paper certificates of their shares to give to their children. Most do not hedge and rely on dividends if applicable, but this group is the kind most able to benefit from hedging. Trying to time the market is bad for this group, so selling covered calls is the best way, and reinvesting the call income can average out their cost basis to make market movements less consequential.

No they don't get free put options, but their cost basis is often lower and/or averaged out over time.

Large corporate raiders can negotiate as many conditions as they like to protect against losses. Such as immediately granting themselves more shares if the market price decreases (which they can sell on the open market). You can get as crafty as you like, when you have negotiating power.

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  • I cannot help but marvel at the depth of your knowledge.Awesome! – Victor123 Apr 8 '15 at 2:31
  • Furthermore, Bill (or more likely his agents) probably sell large volumes of covered calls against his MSFT position as a hedge of downside risk. – Matthew Apr 8 '15 at 3:42
  • (Collar) Sell Calls above the underlying price to help cover the cost of Buying Puts bellow the underlying price. If the underlying climbs Calls & Puts are rolled up to lock in profits. – Optionparty Apr 8 '15 at 13:31

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