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