40 lines
2.7 KiB
Plaintext
40 lines
2.7 KiB
Plaintext
Oapter 32: Structured Products 625
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Another observation that can be made from the figure is that the PERCS pric
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ing curves level off at the redemption price. They cannot sell for more than that
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price.
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Now look on the left-hand side of the figure. Notice that the more time remain
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Ing until maturity, the higher the PERCS will trade above the common stock. This is
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because of the extra dividends that the PER CS pay. Obviously, the PERCS with three
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years until maturity has the potential to pay more dividends than the one with three
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months remaining, so the three-year PERCS will sell for more than the six-month
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PERCS when the common is below the issue price. Since either PERCS pays more
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dividends than the common, they both trade for higher prices than the common.
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When the common trades above the issue price (point 'T'), the opposite is true.
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The six-month PERCS trades for a slightly higher price than the three-year PERCS,
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but both sell for significantly less than the common, which has no limit on its poten
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tial price.
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One other observation can be made regarding the situation in which the com
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mon trades well below the issue price: After the last additional dividend has been
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paid by the PERCS, it will trade for approximately the same price as the common in
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that situation. ·
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Viewed strictly as a security, a PERCS may not appear all that attractive to some
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investors. It has much, but not all, of the downside risk of the common stock, and not
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nearly the upside potential. It does provide a better dividend, however, so if the com
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mon is relatively unchanged from the issue price when the PERCS matures, the
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PERCS holder will have come out ahead. If this description of the PER CS does not
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appeal to you, then neither should covered call writing, for it is the same strategy; a
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call option premium is merely substituted for the higher dividend payout.
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PERCS STRATEGIES
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Since the PERCS is equivalent to a covered write, strategies that have covered writes
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as part of their makeup are amenable to having PERCS as part of their makeup as
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well. Covered writing is part of ratio writing. Other modifications to the covered writ
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ing strategy itself, such as the protected covered write, can also be applied to the
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PERCS.
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PROTECTING THE PERCS WITH LISTED OPTIONS
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~
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The safest way to protect the PERC S holding with listed options is to buy an out-of
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the-nwney put. The resultant position - long PERCS and long put - is a protected
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covered write, or a "collar." The long put prevents large losses on the downside, but
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it costs the PERCS holder something. He won't make as much from his extra divi
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dend payout, because he is spending money for the listed put. Still, he may want the
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downside comfort. |