Key takeaways
- A synthetic variable prepaid forward protects a concentrated position and raises cash today, without selling a share and without triggering a capital gain.
- It is built from parts you control: a collar (a protective put plus a sold call) protects the downside and caps the upside, and a box spread turns the position into cash at near-Treasury rates.
- It is a deferral, not a free lunch. You cap your upside, the box spread is a loan you repay, and the collar must be spaced wide enough to avoid the constructive sale rule.
The SpaceX and OpenAI IPOs are about to mint a generation of new paper millionaires, each holding one position that made them wealthy and that they cannot easily sell.
Most people with a concentrated position think they have only two choices: hold it and stay fully exposed to a single stock, or sell it and pay the tax before they can reinvest a dollar.
There are several other ways to tap into liquidity without creating a taxable event. One of them, traditionally called a variable prepaid forward, lets a bank or counterparty advance you cash today against shares you deliver later, with downside protection built in. The good news is that you do not need the bank's version. We have been running a synthetic one, rebuilt transparently from listed options.
What a variable prepaid forward actually is
A variable prepaid forward (VPF) is a contract in which you receive cash today in return for agreeing to deliver a variable number of shares at a future date, with a band of price protection built in. Hedge funds, family offices, and concentrated founders have used VPFs for decades to take chips off the table without selling.
The packaged bank version works, but it tends to be expensive, opaque, and controlled by a single counterparty. The economics, though, are not magic. They come from two well-understood building blocks: a collar for protection, and a loan for liquidity. Both can be assembled from listed instruments.
Step one: the collar
Say you have a concentrated stock position. The collar is two option trades that bracket it.
First, we buy a put option beneath the current price. A put gives you the right to sell at the strike price, so if the stock falls, you can still sell at that level. That protects your downside no matter how far the stock drops.
Next, we sell a call option above the current price. A call obligates you to sell at the strike if the buyer exercises, so your gains above that level stop. In exchange for accepting that cap, you collect a premium, and that premium helps pay for the put you just bought.
Together, the long put and the short call form a collar. The position is now bracketed: protected on the downside, capped on the upside, and free to move in between.
Step two: the box spread for liquidity
A collar protects the position, but it does not put cash in your pocket. That is the job of the box spread.
A box spread is a package of S&P 500 index options (SPX) that, combined, behaves like a fixed-rate loan. You receive cash up front and repay a known amount at a known date, with the rate set by the options market rather than a bank's lending desk. Historically that rate has priced close to Treasury yields, which is why box spreads are one of the cheapest forms of financing available to an investor with eligible collateral.
Layer the box spread on top of the collared position and you have completed the structure. The protected shares serve as the backdrop, the box spread delivers the cash, and you have rebuilt a variable prepaid forward from parts you fully control.
Protect the position with a collar. Raise the cash with a box spread. Keep the shares, and trigger no taxable sale.
Hold, sell, or a third option
It helps to line up the choices. Holding the position keeps your full upside, but also your full downside, and it raises no cash. One bad quarter can erase years of gains. Selling is safe and liquid, but you realize the gain now and incur a tax bill, and the future upside is gone.
The synthetic variable prepaid forward is the third option. You keep the shares, protect the downside, raise cash at potentially attractive rates, and defer the taxable event.
Why it is powerful
Selling to de-risk is a one-way door. You realize the gain, pay the tax now, and give up both the future upside and a meaningful slice of capital. The synthetic variable prepaid forward keeps you in the position. No shares are sold, so there is no gain to report and no check to the IRS today.
The downside is protected, a defined slice of upside is retained, and the borrowed cash is available to diversify or spend. The gain stays deferred inside shares you still own, with the potential step-up in basis at death still intact.
What to plan around
This structure rewards planning, and it is not right for everyone. A few honest trade-offs:
- You give up the gains above the call strike. If you believe the stock has another double in it and you can stomach the risk, a cap will chafe.
- The box spread is borrowed money. It is cheap, but it is a loan with a repayment date, and it requires liquid collateral.
- The collar cannot be too tight. A hedge that strips out almost all of your risk and reward can be treated as a constructive sale, taxed as if you had sold. The put and call strikes have to be spaced widely enough to keep real exposure, and that spacing is a deliberate planning decision.
If you simply want out of the stock, or you expect to hold until a step-up wipes out the gain entirely, other paths may serve you better. For an investor who wants protection and liquidity while staying invested, the synthetic VPF is hard to beat.
How STQ thinks about it
We do not start with the structure. We start with the position: the cost basis, the concentration, the conviction in the stock, the liquidity need, and the timeline.
Then we match the tool to the situation and build it transparently, with strikes chosen to balance protection against the constructive sale rule, and financing priced against the market rather than a bank's desk. Most advisors have never heard of this. We build it regularly.
If you are holding a large, low-basis position and you need liquidity without triggering the gain, it is worth mapping the structure before you act. Send me a note and we can walk through whether it fits.
This is informational only and not personalized tax, legal, or investment advice.
Frequently asked questions
What is a variable prepaid forward (VPF)?
A contract in which you receive cash today in exchange for agreeing to deliver a variable number of shares at a future date, with downside protection built in. Private banks have sold packaged VPFs to concentrated shareholders for decades.
How is a synthetic VPF different from a bank VPF?
A synthetic version rebuilds the same economics from listed options you control: a protective put and a sold call form a collar, and a box spread provides the cash. It avoids the markup, opacity, and counterparty lock-in of a packaged bank product.
Do I owe tax when this is set up?
No shares are sold, so there is no realized capital gain at execution. The box spread raises cash as a loan, not a sale. The position stays deferred, and you keep your original cost basis and the potential step-up in basis at death.
What is the constructive sale rule and how do you avoid it?
Under the constructive sale rule, a hedge that removes nearly all of your risk and reward can be treated as if you sold the stock. A collar avoids this when the put and call strikes are spaced widely enough to retain meaningful exposure. Spacing is a planning decision, not an afterthought.
Who is a synthetic VPF right for, and wrong for?
It fits a holder of a large, low-basis position who wants protection and liquidity without selling. It is wrong for someone willing to give up all upside, who lacks liquid collateral, or who simply wants out of the stock entirely. Selling may be cleaner in those cases.
Let's talk.
I'd love to walk through what a tax-efficient approach could look like for your specific situation.
Schedule a Call →