2013 CBOE s 29th Annual Risk Management Conference Agenda. Equity Risk Management Single Stock Concentration Solutions N O R T H E R N T R U S T

Transcription

1 N O R T H E R N T R U S T 2013 CBOE s 29th Annual Risk Management Conference Agenda Equity Risk Management Single Stock Concentration Solutions Mike Leon, Senior Vice President 312/ ml35@ntrs.com 2013 Northern Trust Corporation northerntrust.com

2 Tax Disclaimer Investors are strongly advised to consult their tax and legal advisors in considering the tax consequences of their own specific circumstances. 2

3 Overview of Presentation Market Trends Low Basis Single Stock Case Study Issues on writing calls on Portfolios 3

4 2013 Key Market Trends Clients are becoming more focused on after tax returns Tax deferral strategies are gaining more importance Clients preferring exchange traded products Income generation high priority for high net worth investors 4

5 Case Study Single Stock Hedging Client Fact Pattern Owns 200,000 shares of per share value $18 million Looking to move into a diversified portfolio and increase income thru covered call writing Cost Basis $7.0 million. Federal Tax $2,618,000 liability State Tax $600,000 Leaves $14,782,000 or 82.1% available for reinvestment Market Cap Large Dividend Yield 2.50% Implied at the money 1 yr. vol 15 5

6 Hedging Strategy Enter into a 1 year Zero cost collar using Flex options or 200,000 of XYZ stock price $90 position value $18 million Put Strike 90% $81 Call Strike % $92.82 Put Strike 85% $76.5 Call Strike % $95.63 American style makes the call worth more giving more upside Need to manage the early exercise risk Borrow $14,782,000 Rate 1.75% or $258,865 Dividend on or $450,000 Positive carry of $191,315 or 1.06% TAX STRADDLE RULES WILL APPLY Investors are strongly advised to consult their tax and legal advisors in considering the tax consequences of their own specific circumstances. 6

7 RE-Investment Strategy Buy S&P 500 ( SPY ) ETF Sell qualified covered calls Calls Taxed as short term gain or losses Sell SPX Index calls Calls not considered qualified When the stocks contained in a stock index and a portfolio of stock "substantially overlap," offsetting positions in the portfolio of stocks and in instruments based on that index will be subject to the anti-straddle (including the loss deferral) rules. Treasury regulations provide an objective mechanical test to determine the amount of overlap between the portfolio and the index and the extent to which the anti-straddle rules apply. 7

8 Important Disclosure Information Mike Leon, Managing Director Mike Leon is a registered representatives of Northern Trust Securities, Inc. In the event you have an interest in pursuing a hedging strategy, you will be advised by a registered representative of Northern Trust Securities, Inc. (NTSI), an Affiliate brokerdealer of Northern Trust, regarding this approach. Northern Trust Securities, Inc. is a member of SIPC, FINRA, and is a subsidiary of Northern Trust Corporation. 8

9 Important Disclosure Information (cont.) Structured securities, derivatives and options are complex instruments that are not suitable for every investor, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Supporting documentation for any claims, comparisons, recommendations, statistics or other technical data will be supplied upon request. Any trade information is preliminary and not intended as an official transaction confirmation. Please read the Options Clearing Corporation s disclosure document Please consult your tax advisor before making investment decisions based on the information provided and for tax reporting purposes. Investment products and services are offered through Northern Trust Securities, Inc., member FINRA and SIPC and a subsidiary of Northern Trust Corporation. For more information, please contact your Investment Consultant or call The strategies mentioned here may help to decrease the risk of your investments, however, they may also limit the upside potential of your investments. Risks: Call or Put Purchasing: The risk of purchasing a call/put is that you will lose the entire premium paid. Uncovered Call Writing: The risk of selling an uncovered call is unlimited and may result in losses significantly greater than the premium received. Uncovered Put Writing: The risk of selling an uncovered put is significant and may result in losses significantly greater than the premium received. Call or Put Vertical Spread Purchasing (same expiration month for both options): The basic risk of effecting a long spread transaction is limited to the premium paid when the position is established. Call or Put Vertical Spread Writing (same expiration month for both options): The basic risk of effecting a short spread transaction is limited to the difference between the strike prices less the amount received in premiums. Call or Put Calendar Spread Purchasing (different expiration months and short must expire prior to the long): The basic risk of effecting a long calendar spread transaction is limited to the premium paid when the position is established. 9

10 Important Disclosure Information (cont.) This material is for informational purposes only and is not intended to be an offer or solicitation. It is intended solely for the information of those to whom it is distributed by Northern Trust Securities, Inc. ( NTSI ). No part of this material may be reproduced or retransmitted in any manner without the prior written permission of NTSI. NTSI does not represent, warrant, or guarantee that this information is accurate, complete or suitable for any purpose and it should not be used as a basis for investment decisions. This material does not purport to contain all of the information that a prospective investor may wish to consider. This material is not to be relied upon as such or used in substitution for the exercise of independent judgment. Past results are not an indicator or guarantee of future returns. Alternative modeling techniques or representation is made that any account will or is likely to achieve profits or losses similar to those shown. Alternative modeling techniques or assumptions might produce significantly different results and prove to be more appropriate. Past hypothetical backtest results are neither an indicator nor guarantee of future returns. Actual results will wary, perhaps materially, from the analysis. As a sophisticated investor, you accept and agree to use such information only for the purposes of discussing with NTSI your preliminary interest in investing in the strategy decision herein. NOT FDIC INSURED May lose value/no bank guarantee 10