622 Part V: Index Options and Futures 
For the remainder of this chapter, the call price of the PERCS will be referrea 
to as the redemption price. Since much of the rest of this chapter will be concemec 
with discussing the fact that a PERCS is related to a call option, there could be somE 
confusion when the word call is used. In some cases, call could refer to the price at 
which the PER CS can be called; in other cases, it could refer to a call option - either 
a listed one or one that is imbedded within the PERCS. Hence, the word redemp­
tion will be used to refer to the action and price at which the issuing compa:J)ly may 
call the PERCS. 
A PERCS IS A COVERED CALL WRITE 
It was stated earlier that a PER CS is like a covered write. However, that has not yet 
been proven. It is known that any two strategies are equivalent if they have the same 
profit potential. Thus, if one can show that the profitability of owning a PER CS is the 
same as that of having established a covered call write, then one can conclude that 
they are equivalent. 
Example: For the purposes of this example, suppose that there is a three-year listed 
call option with striking price 39 available to be sold on XYZ common stock. Also, 
assume that there is a PERCS on XYZ that has a redemption price of 39 in three 
years. The following prices exist: 
XYZ common: 35 
XYZ PERCS: 35 
3-year call on XYZ common with striking price of 39: 4.50 
First, examine the XYZ covered call write's profitability from buying 100 XY2 and 
selling one call. It was initially established at a debit of 30.50 (35 less the 4.50 
received from the call sale). The common pays $1 per year in dividends, for a total of 
$3 over the life of the position. 
XYZ Price Price of a Profit/loss on Total Profit/loss 
in 3 Years 3-Year Call Securities Incl. Dividend 
25 0 -$550 -$250 
30 0 -50 +250 
35 0 +450 +750 
39 0 +850 + 1,150 
45 6 +850 + 1,150 
50 11 +850 + 1,150