42 lines
2.5 KiB
Plaintext
42 lines
2.5 KiB
Plaintext
620
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Stock price appreciation 139 - 35):
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Dividends over 3 years:
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Total gain
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Total return:
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Annualized return:
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Part V: Index Options and Future.
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4
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7.50
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11.50
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11.50/35 = 32.9%
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32.9%/3 = 11%
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If the PERCS were called at an earlier time, the annualized return might be ever
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higher. ·
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CALL FEATURE
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The company will most likely call the PER CS if the common is above the call price
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for even a short period of time. The prospectus for the PERCS will describe any
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requirements regarding the call. A typical one might be that the common must close
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above the call price for five consecutive trading days. If it does, then the company
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may call the PERCS, although it does not have to. The decision to call or not is strict
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ly the company's. The PERCS holder has no choice in the matter of when or if his
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shares are called. This is the same situation in which the writer of a covered call finds
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himself: He cannot control when the exercise will occur, although there are often
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clues, including the disappearance of time value premium in the written listed call
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option. The PERCS holder is more in the dark, because he cannot actually see the
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separate price of the imbedded call within the PERCS. Still, as will be shown later,
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he may be able to use several clues to determine whether a call is imminent.
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Most PERCS may be called for either cash or common stock. This does not
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change the profitability from the strategist's standpoint. He either receives cash in
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the amount of the call price, or the same dollar amount of common stock. The only
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difference between the two is that, in order to completely close his position, he would
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have to sell out any common stock received via the call feature. If he had received
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cash instead, he wouldn't have to bother with this final stock transaction.
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In the case of most PERCS, the call feature is more complicated than that pre
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sented in the preceding example. Recall that the company that issued the PERCS
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can call it at any time during the three years, as long as the common is above the call
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price. The holder of the XYZ PERCS in the example would not be pleased to find
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that the PER CS was called before he had received any of the higher dividends that
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the PERCS pays. Therefore, in order to give a PERCS holder essentially the same
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return no matter when the PERCS is called, there is a "sliding scale" of call prices. -
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At issuance, the call price will be the highest. Then it will drop to a slightly
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lower level after some of the dividends have been paid (perhaps after the first year). |