O.,,ter 32: Structured Products 623 
TI1is is the typical picture of the total return from a covered write - potential losses on 
the downside with profit potential limited above the striking price of the written call. 
Now look at the profitability of buying the PER CS at 35 and holding it for three 
(Assume that it is not called prior to maturity.) The PER CS holder will earn a 
total of $750 in dividends over that time period. 
XYZ Price Profit/Loss on Total Profit/Loss 
in 3 Years PERCS Incl. Dividend 
25 -$1,000 -$250 
30 -500 +250 
35 0 +750 
>=39 +400 + 1, 150 
This is exactly the same profitability as the covered call write. Therefore, it can be 
concluded with certainty that a PERCS is equivalent to a covered call write. Note 
that the PER CS potential early redemption feature does not change the truth of this 
statement. The early redemption possibility merely allows the PERCS holder to 
receive the same total dollars at an earlier point in time if the PERCS is demanded 
prior to maturity. The covered call writer could theoretically be facing a similar situ­
ation if the written call option were assigned before expiration: He would make the 
same total profit, but he would realize it in a shorter period of time. 
The PERCS is like a covered write of a call option with striking price equal to 
the redemption price of the PERCS, except that the holder does not receive a call 
option premium, but rather receives additional dividends. In essence, the PERCS 
has a call option imbedded within it. The value of the imbedded call is really the 
value of the additional dividends to be paid between the current date and maturity. 
The buyer of a PERCS is, in effect, selling a call option and buying common 
stock. He should have some idea of whether or not he is selling the option at a rea­
sonably fair price. The next section of this chapter addresses the problem of valuing 
the call option that is imbedded in the PERCS. 
PRICE BEHAVIOR 
The way that a PERCS price is often discussed is in relationship to the common 
stock. One may hear that the PERCS is trading at the same price as the common or 
at a premium or discount to the common. As an option strategist who understands 
covered call writing, it should be a simple matter to picture how the PERCS price 
will relate to the common price.