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+626 Part V: Index Options and Futures 
+Once one realizes that a PERCS is equivalent to a covered write, he can easily 
+extend that equivalence to other positions as well. For example, it is known that a 
+covered call write is equivalent to the sale of a naked put. Thus, owning a PERCS is 
+equivalent to the sale of a naked put. Obviously, the easiest way to hedge a naked put 
+is to buy another put, preferably out-of-the-money, as protection. 
+Do not be deluded into thinking that selling a listed call against the PERCS is 
+a safe way of hedging. Such a call option sale does add a modicum of downside pro­
+tection, but it exposes the upside to large losses and therefore introduces a potential 
+risk into the position. It is really a ratio write. The subject is covered later in this 
+chapter. 
+REMOVING THE REDEMPTION FEATURE 
+At issuance, the imbedded call is a three-year call, so it is not possible to exactly 
+duplicate the PERCS strategy in the listed market. However, as the PERCS nears 
+maturity, there will be listed calls that closely approximate the call that is imbedded 
+in the PERCS. Consequently, one may be able to use the listed call or the underly­
+ing stock to his advantage. 
+If one were to buy a listed call with features similar to the imbedded call in a 
+PERCS that he owned, he would essentially be creating long common stock. Not that 
+one would necessarily need to go to all that trouble to create long common stock, but 
+it might provide opportunities for arbitrageurs. 
+In addition, it might appeal to the PERCS holder if the common stock has 
+declined and the imbedded call is now inexpensive. If one covers the equivalent of 
+the imbedded call in the listed market, he would be able to more fully participate in 
+upside participation if the common were to rally later. This is not always a profitable 
+strategy, however. It may be better to just sell out the PERCS and buy the common 
+if one expects a large rally. 
+Example: XYZ issued a PERCS some time ago. It has a redemption price of 39; the 
+common pays a dividend of $1 per year, while the PER CS pays $2.50 per year. 
+XYZ has fallen to a price of 30 and the PERCS holder thinks a rally may be 
+imminent. He knows that the imbedded call in the PERCS must be relatively inex­
+pensive, since it is 9 points out-of-the-money (the PERCS is redeemable at 39, while 
+the common is currently 30). Ifhe could buy back this call, he could participate more 
+fully in the upward potential of the stock. 
+Suppose that there is a one-year LEAPS call on XYZ with a striking price of 40. 
+If one were to buy that call, he would essentially be removing the redemption fea-­
+ture from his PERCS. 
+Assume the following prices exist: