Need help on reading abt variable prepaid forward (It’s in Low basis stock chapter). According to the CR books, the strategy calls for selling the stock, buying lower strike call and selling higher strike call. Here r my questions: 1. Is $60.875 the current price of stock and is it also the lower strike price? 2. Where is the number 73.05 come from? Thanks in advance…
I’m pretty surprised they are teaching you about VPF’s. A VPF is one of those tax avoidance things that unless you really know what you’re doing, you should just stay away from it (you would get one pissed-off client when the IRS sent him something that your suggestion was a constructive sale and he owes the following interest + penalities). I’m not sure what the CR’s say, but I think that you are talking figuratively above. A VPF is a contract that synthetically does what you say - calls for selling stock at some future date for payment now, buys a call at or usually slightly below the current price and sells a call at some higher price. The strikes on those calls can be anything, but their value is just included in the payment given to the person selling the contract. I suppose that I might do this with a client if I felt like I had some investment bank as a counterparty who offered up a legal opinion that it wasn’t a constructive sale. You should be able to price it out for your client.
Also, there is a TylerDurden who posts on here and a Tyler_Durden who posts. Is this one of those multiple personality things?
Any other help? pls
If you post more details of the question I will help you with it…
JoeyDVivre. Thank you very much for your help. Here are example (quote on quote) given by the CR. In 1998, I (the author) analyzed a variable forward contract, the TRACES on Estee Lauder stock, which were brought to the market and listed on the NYSE by Goldman Sachs Co. I found that the variable forward contract could be analysed as a combination of 3 steps. First, the stock was sold forward, with an agreed delivery delivery several year hence. Second, a number of call at USD 60.875, equal to the number of shares sold, were purchased. Third, calls with a 15% higher strike price were written (the functional equivalent of a sale) on a number of shares equal to 83.3% of the underlying shares sold (noted that 83.3% x 1.15 = 1). The investor was protected against the price of the Estee Lauder stock falling below USD 60.875. He or she would participate one for one in any appreciation of the stock above USD60.875 until USD 73.05, and would receive only 15% of the appreciation of the stock should it rise beyond USD73.05.
Brad Pitt Wrote: ------------------------------------------------------- > Need help on reading abt variable prepaid forward > (It’s in Low basis stock chapter). According to > the CR books, the strategy calls for selling the > stock, buying lower strike call and selling higher > strike call. > > > Here r my questions: > > 1. Is $60.875 the current price of stock and is it > also the lower strike price? These deals can be structured either way. You could make the floor strike prices 90% or the current stock price or 100% (or in between) of the current stock price. > > 2. Where is the number 73.05 come from? > That is the cap strike price. > Thanks in advance… This is essentially a stock collar with a forward sale.
JoeyDVivre Wrote: ------------------------------------------------------- > I’m pretty surprised they are teaching you about > VPF’s. A VPF is one of those tax avoidance things > that unless you really know what you’re doing, you > should just stay away from it (you would get one > pissed-off client when the IRS sent him something > that your suggestion was a constructive sale and > he owes the following interest + penalities). > > I’m not sure what the CR’s say, but I think that > you are talking figuratively above. A VPF is a > contract that synthetically does what you say - > calls for selling stock at some future date for > payment now, buys a call at or usually slightly > below the current price and sells a call at some > higher price. The strikes on those calls can be > anything, but their value is just included in the > payment given to the person selling the contract. > > I suppose that I might do this with a client if I > felt like I had some investment bank as a > counterparty who offered up a legal opinion that > it wasn’t a constructive sale. You should be able > to price it out for your client. We get quotes from a TD Ameritrade Institutional on these. They take the position that it is not a constructive sale based on guidance from the IRS. The have a deptartment that deals only with this stuff, so I would think they are pretty solid on their position. BTW, it only works for high net work individuals (over 5MM) per the IRS…along with some other rules. Not like the good old days of pre-1997 when you could short against the box.
How often do corporate insiders use tools like this to offset highly publicized open market buys of their stock?
mwvt9 Wrote: ------------------------------------------------------- > JoeyDVivre Wrote: > -------------------------------------------------- > ----- > > I’m pretty surprised they are teaching you > about > > VPF’s. A VPF is one of those tax avoidance > things > > that unless you really know what you’re doing, > you > > should just stay away from it (you would get > one > > pissed-off client when the IRS sent him > something > > that your suggestion was a constructive sale > and > > he owes the following interest + penalities). > > > > I’m not sure what the CR’s say, but I think > that > > you are talking figuratively above. A VPF is a > > contract that synthetically does what you say - > > calls for selling stock at some future date for > > payment now, buys a call at or usually slightly > > below the current price and sells a call at > some > > higher price. The strikes on those calls can > be > > anything, but their value is just included in > the > > payment given to the person selling the > contract. > > > > I suppose that I might do this with a client if > I > > felt like I had some investment bank as a > > counterparty who offered up a legal opinion > that > > it wasn’t a constructive sale. You should be > able > > to price it out for your client. > > We get quotes from a TD Ameritrade Institutional > on these. They take the position that it is not a > constructive sale based on guidance from the IRS. > The have a deptartment that deals only with this > stuff, so I would think they are pretty solid on > their position. That would work for me but only with individuals like below. > > BTW, it only works for high net work individuals > (over 5MM) per the IRS…along with some other > rules. > > Not like the good old days of pre-1997 when you > could short against the box.