38 lines
2.8 KiB
Plaintext
38 lines
2.8 KiB
Plaintext
Cl,opter 32: Structured Products 637
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:don. The PERCS is equivalent to a covered write of a long-term call option, which is
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imbedded in the PERCS value. Although there are not many PERCS trading at the
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current time, that number may grow substantially in the future.
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Any strategies that pertain to covered call writing will pertain to PER CS as well.
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Conventional listed options can be used to protect the PERCS from downside risk,
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to remove the limited upside profit potential, or to effectively change the price at
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which the PERCS is redeemable. Ratio writes can be constructed by selling a listed
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call. Shorting PERCS creates a security that is similar to a long put, which might be
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quite expensive if there is a significant amount of time remaining until maturity of
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the PERCS.
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Neutral traders and hedgers should be aware that a PERCS has a delta of its
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own, which is equal to one minus the delta of the imbedded call option. Thus, hedg
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ing PERCS with common stock requires one to calculate the PERCS delta.
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Finally, the implied value of the call option that is imbedded with the PERCS
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can be calculated quite easily. That information is used to determine whether the
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PERCS is fairly priced or not. The serious outright buyer as well as the option strate
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gist should make this calculation, since a PERCS is a security that is option-related.
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Either of these investors needs to know if he is making an attractive investment, and
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calculating the valuation of the imbedded call is the only way to do so.
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OTHER STRUCTURED PRODUCTS
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EXCHANGE-TRADED FUNDS
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Other listed products exist that are simpler in nature than those already discussed,
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but that the exchanges sometimes refer to as structured products. They often take
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the form of unit trusts and mutual funds. The general term for these products is
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Exchange-Traded Funds (ETFs). In a unit trust, an underwriter (Merrill Lynch, for
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example) packages together 10 to 12 stocks that have similar characteristics; perhaps
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they are in the same industry group or sector. The underwriter forms a unit trust with
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these stocks. That is, the shares are held in trust and the resulting entity - the unit
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trust - can actually be traded as shares of its own. The units are listed on an exchange
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and trade just like stocks.
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Example: One of the better-known and popular unit trusts is called the Standard &
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Poor's Depository Receipt{SPDR). It is a unit trust that exactly matches the S&P 500
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index, divided by 10. Th&-SPDR unit trust is affectionately called Spiders (or
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Spyders). It trades on the AMEX under the symbol SPY. If the S&P 500 index itself
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is at 1,400, for example, then SPY will be trading near 140. Unit trusts are very active,
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mostly because they allow any investor to buy an index fund, and to move in and out
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of it at will. The bid-asked spread differential is very tight, due to the liquidity of the |