37 lines
2.7 KiB
Plaintext
37 lines
2.7 KiB
Plaintext
629
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were assigned, the trader could then be simultaneously long the PERCS and short
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common stock, with a long January 40 call in addition. He would have to unwind
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pieces separately, an action that might include exercising the January 40 call (if
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It were in-the-money at expiration) to cover the short common stock.
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The conclusion that can be drawn is that in order to roll down the redemption
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fiature of a PERCS, one must sell a vertical call spread. In a similar manner, if he
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wanted to roll the strike up, he would buy a vertical call spread. Using the same
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example, one would still buy the January 40 call ( this effectively removes the redemp
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tion feature of the PERCS) and would then sell a January 45 call in order to raise the
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redemption price. Thus, buying a vertical call spread raises the effective redemption
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price of a PERCS.
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There is nothing magic about this strategy. Covered writers use it all the time.
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It merely evolves from thinking of a PERCS as a covered write.
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SELLING A CALL AGAINST A LONG PERCS IS A RATIO WRITE
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It is obvious to the strategist that if one owns a PERCS and also sells a call against it,
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he does not have a covered write. The PERCS is already a covered write. What he
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has when he sells another call is a ratio write. His equivalent position is long the com
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mon and short two calls.
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There is nothing inherently wrong with this, as long as the PERCS holder
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understands that he has exposed himself to potentially large upside losses by selling
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the extra call. If the common stock were to rally heavily, the PERCS would stop ris
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ing when it reached its redemption price. However, the additional call that was sold
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would continue to rise in price, possibly inflicting large losses if no defensive action
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were taken.
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The same strategies that apply to ratio writing or straddle writing would have to
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be used by someone who owns a PERCS and sells a call against it. He could buy com
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mon stock if the position were in danger on the upside, or he could roll the call(s) up.
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A difference between ordinary ratio writing and selling a listed call option
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against a PERCS is that the imbedded call in the PERCS may be a very long-term
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call (up to three years). The listed call probably wouldn't be of that duration. So the
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ratio writer in this case has two different expiration dates for his options. This does
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not change the overall strategy, but it does mean that the imbedded long-term call
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will not diminish much in price due to thepssage of time, until the PERCS is near
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er maturity.
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Neutrality is normally an important consideration for a ratio writer. If one is
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long a PERCS and short a listed call, he is by definition a ratio writer, so he should |