Lombard loan or equity collar?

A Lombard loan and an equity collar solve different problems. A Lombard loan raises cash against your shares; a zero-cost collar caps downside (and some upside) using options, without raising much cash. A holder who needs liquidity borrows; one who needs protection hedges — and a concentrated holder sometimes does both.

Two different problems: liquidity vs downside

It is common to weigh a Lombard loan against an equity collar as if they were alternatives, but they answer different questions. The question behind a Lombard loan is: how do I raise cash from this holding without selling it? The question behind a collar is: how do I limit what this holding can lose? One is about liquidity; the other is about risk. Confusing the two leads to the wrong tool — a hedge does not put much cash in your hand, and a loan does not protect you from a fall in the shares. Naming the problem first is what makes the choice straightforward.

What a Lombard loan does

A Lombard loan advances cash against a pledge of your shares or portfolio. You keep ownership, the dividends and voting rights (subject to how the facility is structured), and full exposure to the price — up and down. You draw a fraction of the collateral’s value, pay interest on what you draw, and repay when it suits. What a Lombard loan does not do is protect you from a fall: if the shares drop, you still own them at the lower price, and because the loan is secured on them, a large fall can bring a margin call. A Lombard loan solves liquidity, not risk. The instrument is set out in full in our guide to the Lombard loan.

What an equity or zero-cost collar does

An equity collar is an options hedge placed around a shareholding. The holder buys a put option, which sets a floor: below the put’s strike, further falls in the shares are offset by the option. To avoid paying an out-of-pocket premium for that protection, the holder sells a call option, which sets a ceiling: above the call’s strike, further gains are given up. When the premium received for the call offsets the premium paid for the put, the structure is a zero-cost collar — protection funded by capping the upside rather than by spending cash. The holder still owns the shares and, typically, still receives dividends, but the position’s outcome is now boxed between the two strikes. A collar solves risk, not liquidity: on its own, it does not raise meaningful cash.

Side by side

The two instruments line up cleanly once the purpose of each is clear.

Combining the two

The two tools are not mutually exclusive, and a concentrated holder often benefits from both. A founder or executive with a single large position — the subject of our note on borrowing against a concentrated position — may want liquidity and protection at once: borrow against the stock to raise cash, and collar it to contain the risk of that one name. Combining them can also improve the borrowing itself. A pledged holding that is also collared has a defined floor, which reduces the lender’s downside on the collateral; that can, in some structures, support a more comfortable loan-to-value or ease the margin-call risk that concentrated single-stock lending otherwise carries. The collar-and-borrow combination — hedge the position, then finance the hedged position — is a well-worn technique for exactly the concentrated holdings where both risks bite hardest. It is more complex, involving options as well as a loan, so it is arranged deliberately rather than by default.

Which fits when

Borrow when the need is cash and you are comfortable keeping full exposure — you want liquidity from the holding and expect to hold, or even benefit from, the shares. Collar when the need is protection and raising cash is not the point — you want to defend an appreciated or concentrated position against a fall and will accept a cap on the upside to do it cheaply. Combine them when a single, valuable, concentrated holding must be both financed and defended, and the added complexity is justified by the size of what is at stake. The wider set of routes to liquidity — outright sale, borrowing, hedging, and structured alternatives — is weighed in our overview of liquidity options compared. As ever, the right answer starts from the problem: name whether you need cash or protection, and the instrument follows.