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training_data/curated/text/85286bf59ba72c58cfe1334ecc9616a43b8328505ce2dc4617bb2a8e88d9f654.txt

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+Oapter 32: Structured Products 625 
+Another observation that can be made from the figure is that the PERCS pric­
+ing curves level off at the redemption price. They cannot sell for more than that 
+price. 
+Now look on the left-hand side of the figure. Notice that the more time remain­
+Ing until maturity, the higher the PERCS will trade above the common stock. This is 
+because of the extra dividends that the PER CS pay. Obviously, the PERCS with three 
+years until maturity has the potential to pay more dividends than the one with three 
+months remaining, so the three-year PERCS will sell for more than the six-month 
+PERCS when the common is below the issue price. Since either PERCS pays more 
+dividends than the common, they both trade for higher prices than the common. 
+When the common trades above the issue price (point 'T'), the opposite is true. 
+The six-month PERCS trades for a slightly higher price than the three-year PERCS, 
+but both sell for significantly less than the common, which has no limit on its poten­
+tial price. 
+One other observation can be made regarding the situation in which the com­
+mon trades well below the issue price: After the last additional dividend has been 
+paid by the PERCS, it will trade for approximately the same price as the common in 
+that situation. · 
+Viewed strictly as a security, a PERCS may not appear all that attractive to some 
+investors. It has much, but not all, of the downside risk of the common stock, and not 
+nearly the upside potential. It does provide a better dividend, however, so if the com­
+mon is relatively unchanged from the issue price when the PERCS matures, the 
+PERCS holder will have come out ahead. If this description of the PER CS does not 
+appeal to you, then neither should covered call writing, for it is the same strategy; a 
+call option premium is merely substituted for the higher dividend payout. 
+PERCS STRATEGIES 
+Since the PERCS is equivalent to a covered write, strategies that have covered writes 
+as part of their makeup are amenable to having PERCS as part of their makeup as 
+well. Covered writing is part of ratio writing. Other modifications to the covered writ­
+ing strategy itself, such as the protected covered write, can also be applied to the 
+PERCS. 
+PROTECTING THE PERCS WITH LISTED OPTIONS 
+~ 
+The safest way to protect the PERC S holding with listed options is to buy an out-of 
+the-nwney put. The resultant position - long PERCS and long put - is a protected 
+covered write, or a "collar." The long put prevents large losses on the downside, but 
+it costs the PERCS holder something. He won't make as much from his extra divi­
+dend payout, because he is spending money for the listed put. Still, he may want the 
+downside comfort.