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+632 Part V: Index Options and Futures 
+This is not a static situation. If XYZ changes in price, the delta of the imbedded 
+option will change as well, so that the proper amount of stock to sell as a hedge will 
+change. The deltas will change with the passage of time as well. A change in volatili­
+ty of the common stock can affect the deltas, too. Consequently, one must constant­
+ly recalculate the amount of stock needed to hedge the PERCS. 
+What one has actually created by selling some common stock against his long 
+PERCS holding is another ratio write. Consider the fact that being long 1,000 
+PE RCS shares is the equivalent of being long 1,000 common and short 10 imbedded, 
+long-term calls. If one sells 700 common, he will be left with an equivalent position 
+of long 300 common and short 10 imbedded calls - a ratio write. 
+The person who chooses to hedge his PER CS holding with a partial sale of com­
+mon stock, as in the example, would do well to visualize the resulting hedged posi­
+tion as a neutral ratio write. Doing so will help him to realize that there is both upside 
+and downside risk if the underlying common stock should become very volatile (ratio 
+writes have risk on both the upside and the downside). If the common remains fair­
+ly stable, the value of the imbedded call will decrease and he will profit. However, if 
+it is a long-term imbedded call (that is, if there is a long time until maturity of the 
+PER CS), the rate of time decay will be quite small; the hedger should realize that 
+fact as well. 
+In summary, the sale of some common against a long holding of PERCS is a 
+viable way to hedge the position. When one hedges in this manner, he must contin­
+ue to monitor the position and would be best served by viewing it as a ratio write at 
+all times. 
+SELLING PERCS SHORT 
+Can it make sense to sell PER CS short? The payout of the large dividend seems to 
+be a deterrent against such a short sale. However, if one views it as the opposite of a 
+long-term, out-of-the-money covered write, it may make some sense. 
+A covered write is long stock, short call; it is also equivalent to being long a 
+PERCS. The opposite of that is short stock, long call - a synthetic put. Therefore, a 
+long put is the equivalent of being short a PERCS. Profit graph Hin Appendix D 
+shows the profit potential of being short stock and long a call. There is large down­
+side profit potential, but the upside risk is limited by the presence of the long call. 
+The amount of premium paid for the long call is a wasting asset. If the stock does not 
+decline in price, the long call premium may be lost, causing an overall loss. 
+Shorting a PERCS would result in a position with those same qualities. The 
+upside risk is limited by the redemption feature of the PERCS. The downside prof­
+it potential is large, because the PER CS will trade down in price if the common stoek