The document evaluates Best Buy's 2.25% convertible bonds due 2022 with call overwrites as a risk-adjusted trade on Best Buy stock. It analyzes the trade over 3 time horizons (3 months, 5 months, 15 months) with varying degrees of call option overwrites. Selling calls at higher implied volatilities allows investors to monetize rich option premium. The trade provides upside potential if the stock rises while limiting downside through the call premium collected and bond floor. Tables show estimated returns for the convertible bond under different stock price scenarios and call overwrite strategies.
Indicators Used to Identify Rich or Cheap OptionsRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Using Proprietary Algorithms to Identify an Option's Relative PriceRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Options on the VIX and Mean Reversion in Implied Volatility Skews RYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Exchanges are centralized places where certain securities, commodities, derivatives, and other financial instruments are traded. In order to facilitate trading among buyers and sellers of these products, exchanges take the central position of being the counterparty to both buyers and the sellers of the product. This is done to remove the possibility of disputes that may arise from the non-performance of the counterparty. The exchange guarantees trades will be honored. This creates credit risk for the exchange attributable to the buyers and the sellers of its products. To address the potential loss due to the credit risk undertaken by exchanges from these buyers and sellers of the exchange traded products, exchanges demand certain margin requirements from their counterparties.
This presentation addresses in detail the issues that are considered for calculation of margin requirements and maintenance.
The turm oil in financial markets across the globe caused by the rating downgrade of US Government debt by S&P will continue to haunt the Indian markets also for quite sometime to come.
Enhanced Call Overwriting*
Systematically overwriting the S&P 500 with 1-month at-the-money calls, rebalanced on a monthly basis at expiration, outperformed the S&P 500 Index during our sample period (1996 – 2005). This “base case” overwriting strategy also generated superior risk-adjusted returns versus the index.
Overwriting portfolios with out-of-the-money calls tends to outperform at-the-money overwriting during market rallies, but provides less protection during market downturns. However, out-of-the money overwriting also results in relatively higher return variability and inferior risk-adjusted performance.
During the sample period, overwriting the S&P 500 with short-dated options, rebalanced more frequently, outperformed overwriting with longer-dated options, rebalanced less frequently. We discuss possible explanations for these performance differences.
We find that going long the market during periods of heightened short-term anxiety, inferred from the presence of relatively high S&P 500 1-month at-the-money implied volatility, has, on average, been a winning strategy. To a slightly lesser extent, having relatively less exposure to the market during periods of complacency – or relatively low implied market implied volatility – was also beneficial.
We create an “enhanced” overwriting strategy – whereby investors systematically overwrite the S&P 500 or Nasdaq 100 with disproportionately fewer (more) calls against the indices when risk expectations are relatively high (low).
Our enhanced overwriting portfolios handily outperformed the base case overwrite portfolios and the respective underlying indices, on an absolute and risk-adjusted basis. For example, the average annual return for the S&P 500 enhanced overwriting portfolio from 1997 – 2005 was 7.9%, versus 6.6% for the base case overwrite portfolio and 5.5% for the S&P 500 Index.
Overwriting with fewer calls when implied volatility is rich, and more calls when implied volatility is cheap, could improve the absolute and risk-adjusted performance of index-oriented overwriting portfolios.
This goes against the conventional tendency for investors to sell calls against their positions when implied volatility is high.
*Renicker, Ryan and Devapriya Mallick., “Enhanced Call Overwriting.”, Lehman,Brothers Global Equity Research Nov 17, 2005.
Indicators Used to Identify Rich or Cheap OptionsRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Using Proprietary Algorithms to Identify an Option's Relative PriceRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Options on the VIX and Mean Reversion in Implied Volatility Skews RYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Exchanges are centralized places where certain securities, commodities, derivatives, and other financial instruments are traded. In order to facilitate trading among buyers and sellers of these products, exchanges take the central position of being the counterparty to both buyers and the sellers of the product. This is done to remove the possibility of disputes that may arise from the non-performance of the counterparty. The exchange guarantees trades will be honored. This creates credit risk for the exchange attributable to the buyers and the sellers of its products. To address the potential loss due to the credit risk undertaken by exchanges from these buyers and sellers of the exchange traded products, exchanges demand certain margin requirements from their counterparties.
This presentation addresses in detail the issues that are considered for calculation of margin requirements and maintenance.
The turm oil in financial markets across the globe caused by the rating downgrade of US Government debt by S&P will continue to haunt the Indian markets also for quite sometime to come.
Enhanced Call Overwriting*
Systematically overwriting the S&P 500 with 1-month at-the-money calls, rebalanced on a monthly basis at expiration, outperformed the S&P 500 Index during our sample period (1996 – 2005). This “base case” overwriting strategy also generated superior risk-adjusted returns versus the index.
Overwriting portfolios with out-of-the-money calls tends to outperform at-the-money overwriting during market rallies, but provides less protection during market downturns. However, out-of-the money overwriting also results in relatively higher return variability and inferior risk-adjusted performance.
During the sample period, overwriting the S&P 500 with short-dated options, rebalanced more frequently, outperformed overwriting with longer-dated options, rebalanced less frequently. We discuss possible explanations for these performance differences.
We find that going long the market during periods of heightened short-term anxiety, inferred from the presence of relatively high S&P 500 1-month at-the-money implied volatility, has, on average, been a winning strategy. To a slightly lesser extent, having relatively less exposure to the market during periods of complacency – or relatively low implied market implied volatility – was also beneficial.
We create an “enhanced” overwriting strategy – whereby investors systematically overwrite the S&P 500 or Nasdaq 100 with disproportionately fewer (more) calls against the indices when risk expectations are relatively high (low).
Our enhanced overwriting portfolios handily outperformed the base case overwrite portfolios and the respective underlying indices, on an absolute and risk-adjusted basis. For example, the average annual return for the S&P 500 enhanced overwriting portfolio from 1997 – 2005 was 7.9%, versus 6.6% for the base case overwrite portfolio and 5.5% for the S&P 500 Index.
Overwriting with fewer calls when implied volatility is rich, and more calls when implied volatility is cheap, could improve the absolute and risk-adjusted performance of index-oriented overwriting portfolios.
This goes against the conventional tendency for investors to sell calls against their positions when implied volatility is high.
*Renicker, Ryan and Devapriya Mallick., “Enhanced Call Overwriting.”, Lehman,Brothers Global Equity Research Nov 17, 2005.
Case study of a comprehensive risk analysis for an asset managerGateway Partners
The following case study is an excerpt of a comprehensive risk analysis prepared for an asset manager client of Gateway Partners. This client is a medium-sized asset manager with offices in both the U.S. and abroad who needed assistance in both quantifying and fully understanding the risk profile of their multi-billion dollar portfolio. Additional risk concerns of this client include “worst case” risk scenario analysis and the use of derivative instruments to assist in the hedging of their portfolio. While this case study has been used with the permission of our client, specific securities and the amounts they represent in the client portfolio have been changed and reduced to protect the identity of the client. Gateway Partners is proud to present this case study as an example of the risk management services we provide to our clients.
[EN] Convertible bonds offer investors equity-like returns with a risk profil...NN Investment Partners
NN Investment Partners explains how convertible bonds offer investors equity-like returns with a risk profile comparable to that of bonds, from November 2015.
Realized and implied index skews, jumps, and the failure of the minimum-varia...Volatility
1) Empirical evidence for the log-normality of implied and realized volatilities of stock indices
2) Apply the beta stochastic volatility (SV) model for quantifying implied and realized index skews
3) Origin of the premium for risk-neutral skews and its impacts on profit-and-loss (P\&L) of delta-hedging strategies
4) Closed-form solution for the mean-reverting log-normal beta SV model
5) Optimal delta-hedging strategies to improve Sharpe ratios
6) Argue why log-normal beta SV model is better than its alternatives
Consistently Modeling Joint Dynamics of Volatility and Underlying To Enable E...Volatility
1) Analyze the dependence between returns and volatility in conventional stochastic volatility (SV) models
2) Introduce the beta SV model by Karasinski-Sepp, "Beta Stochastic Volatility Model", Risk, October 2012
3) Illustrate intuitive and robust calibration of the beta SV model to historical and implied data
4) Mix local and stochastic volatility in the beta SV model to produce different volatility regimes and equity delta
Stochastic Local Volatility Models: Theory and ImplementationVolatility
1) Hedging and volatility
2) Review of volatility models
3) Local volatility models with jumps and stochastic volatility
4) Calibration using Kolmogorov equations
5) PDE based methods in one dimension
5) PDE based methods in two dimensions
7) Illustrations
Style-Oriented Option Investing - Value vs. Growth?RYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
The Lehman Brothers Volatility Screening ToolRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Short Variance Swap Strategies on the S&P 500 Index Profitable, Yet RiskyRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Case study of a comprehensive risk analysis for an asset managerGateway Partners
The following case study is an excerpt of a comprehensive risk analysis prepared for an asset manager client of Gateway Partners. This client is a medium-sized asset manager with offices in both the U.S. and abroad who needed assistance in both quantifying and fully understanding the risk profile of their multi-billion dollar portfolio. Additional risk concerns of this client include “worst case” risk scenario analysis and the use of derivative instruments to assist in the hedging of their portfolio. While this case study has been used with the permission of our client, specific securities and the amounts they represent in the client portfolio have been changed and reduced to protect the identity of the client. Gateway Partners is proud to present this case study as an example of the risk management services we provide to our clients.
[EN] Convertible bonds offer investors equity-like returns with a risk profil...NN Investment Partners
NN Investment Partners explains how convertible bonds offer investors equity-like returns with a risk profile comparable to that of bonds, from November 2015.
Realized and implied index skews, jumps, and the failure of the minimum-varia...Volatility
1) Empirical evidence for the log-normality of implied and realized volatilities of stock indices
2) Apply the beta stochastic volatility (SV) model for quantifying implied and realized index skews
3) Origin of the premium for risk-neutral skews and its impacts on profit-and-loss (P\&L) of delta-hedging strategies
4) Closed-form solution for the mean-reverting log-normal beta SV model
5) Optimal delta-hedging strategies to improve Sharpe ratios
6) Argue why log-normal beta SV model is better than its alternatives
Consistently Modeling Joint Dynamics of Volatility and Underlying To Enable E...Volatility
1) Analyze the dependence between returns and volatility in conventional stochastic volatility (SV) models
2) Introduce the beta SV model by Karasinski-Sepp, "Beta Stochastic Volatility Model", Risk, October 2012
3) Illustrate intuitive and robust calibration of the beta SV model to historical and implied data
4) Mix local and stochastic volatility in the beta SV model to produce different volatility regimes and equity delta
Stochastic Local Volatility Models: Theory and ImplementationVolatility
1) Hedging and volatility
2) Review of volatility models
3) Local volatility models with jumps and stochastic volatility
4) Calibration using Kolmogorov equations
5) PDE based methods in one dimension
5) PDE based methods in two dimensions
7) Illustrations
Style-Oriented Option Investing - Value vs. Growth?RYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
The Lehman Brothers Volatility Screening ToolRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Short Variance Swap Strategies on the S&P 500 Index Profitable, Yet RiskyRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Pricing Exotics using Change of NumeraireSwati Mital
The intention of this essay is to show how change of numeraire technique is used in pricing derivatives with complex payoffs. In the first instance, we apply the technique to pricing European Call Options and then use the same method to price an exotic Power Option.
Efficient Numerical PDE Methods to Solve Calibration and Pricing Problems in ...Volatility
1) Volatility modelling
2) Local stochastic volatility models: stochastic volatility, jumps, local volatility
3) Calibration of parametric local volatility models using partial differential equation (PDE) methods
4) Calibration of non-parametric local volatility volatility models with jumps and stochastic volatility using PDE methods
5) Numerical methods for PDEs
6) Illustrations using SPX and VIX data
An Approximate Distribution of Delta-Hedging Errors in a Jump-Diffusion Model...Volatility
1) Analyse the distribution of the profit&loss (P&L) of delta-hedging strategy for vanilla options in Black-Scholes-Merton (BSM) model and an extension of the Merton jump-diffusion (JDM) model assuming discrete trading and transaction costs
2) Examine the connection between the realized variance and the realized P&L
3) Find approximate solutions for the P&L volatility and the expected total transaction costs
4) Apply the mean-variance analysis to find the trade-off between the costs and P&L variance given hedger's risk tolerance
5) Consider hedging strategies to minimize the jump risk
Achieving Consistent Modeling Of VIX and Equities DerivativesVolatility
1) Discuss model complexity and calibration
2) Emphasize intuitive and robust calibration of sophisticated volatility models avoiding non-linear calibrations
3) Present local stochastic volatility models with jumps to achieve joint calibration to VIX options and (short-term) S&P500 options
4) Present two factor stochastic volatility model to fit both the short-term and long-term S&P500 option skews
Summerlin Asset Management, LLC (SAM), is a diversified real estate investment and management company. SAM's expertise is the purchase, service, and resale, of both performing and non-performing real estate notes secured by the Deed of Trust or Mortgage.
4272015Portfolio for Risk Tolerant InvestorsAn Intriguing Tr.docxgilbertkpeters11344
4/27/2015
Portfolio for Risk Tolerant InvestorsAn Intriguing Trading Experience
Abstract
The six-week trading began with a thorough investigation of the companies that showed a steady growth over a long period. Factors that determined the growth were analyzed and informed investment decisions were executed to reflect the market conditions. Investment strategies were devised for optimum capital growth and knowledge was gained throughout the trading period as to how investors can manage risk through various trading strategies. Power to analyze companies with consistent substantial margins and ability to invest in them enabled understanding of timely decision enhancement techniques for future investments.Portfolio for Risk Tolerance InvestorsAn Intriguing Trading Experience
Introduction:
Briefly describe the following. What have accomplished in the project? What are your investment goals, your investment benchmark, and trading strategy? How did your fund perform relative to the market? Specify some main performance metrics, such as the Sharpe ratio. At the end of your Introduction, briefly lay out the organization of the remaining part of your report. The Fund
The idea is to replicate Warren Buffet’s half a century famous Berkshire Hathaway’s investing strategy. Berkshire Hathaway Inc. is the fifth largest company in the world. It is a well-diversified company, an American multinational conglomerate, that owns (in full or significant percentage) insurance companies, pharmaceuticals, food, jewelry, international, jets, newspaper, electric, gas, and more and acts like an index itself. The four largest investments are Wells Fargo & Co., Coca-Cola Co., International Business Machines Corp. and American Express Co., which Berkshire Hathaway owns 9%, 9%, 6% and 14% of, respectively, making Berkshire Hathaway the largest investor in each.
Recently, Berkshire Hathaway has invested in undervalued companies such as General Motors Co., Verizon Communications Inc., Suncor Energy Inc., and more and joined Prudential Bridgeport Realtors. Based on the company’s net income increase year after year, and by consistent substantial margins, we continued to believe that investing in Berkshire Hathaway class A stocks would be a good investment strategy. The start-up fund was initially invested in Warren Buffet’s Berkshire Hathaway stock, which is considered as the foremost business strategy as a mutual fund in investing.
However, the goal was not to construct a 100% risky portfolio, hence the fund was invested in a managed mix of 60% stocks and 40% fixed income securities under normal circumstances. The main holdings of our fund include companies such as Health Net Inc.- a health care service company (HNT), White Petroleum Corp. and Oasis Petroleum Inc. (OAS & WLL), PIFCO ETF- fixed securities (BOND), Berkshire Hathaway (BRK A), and Church & Dwight Co.- a manufacturing company (CHD). Efforts were taken to include securities from both large and small market.
Asset intensive reinsurance has been a hot topic in the marketplace, in particular reinsurance for fixed annuities, variable annuities and indexed annuities.
With variable annuities in particular, the products have been written recently specifically combat the difficulties posed by the low interest rate environment. With GAAP ROEs as healthy as ever, solution providers (banks/reinsurers) are looking to enter into the variable annuity reinsurance market to get their "share of the pie".
The asset intensive reinsurance world is evolving rapidly, and I will be presenting this evolution for certain high-profile products during the Valuation Actuary Symposium on 8/31 at 10:00 AM.
Hope to see many of you friendly faces there!
[LATAM EN] Convertible bonds offer investors equity-like returns with a risk ...NN Investment Partners
NN Investment Partners explains how convertible bonds offer investors equity-like returns with a risk profile comparable to that of bonds, from November 2015.
[CH] Convertible bonds offer investors equity-like returns with a risk profil...NN Investment Partners
NN Investment Partners explains how convertible bonds offer investors equity-like returns with a risk profile comparable to that of bonds, from November 2015.
NN Investment Partners explains how convertible bonds offer investors equity-like returns with a risk profile comparable to that of bonds, from November 2015.
[UK] Convertible bonds offer investors equity-like returns with a risk profil...NN Investment Partners
NN Investment Partners explains how convertible bonds offer investors equity-like returns with a risk profile comparable to that of bonds, from November 2015.
[JP] Convertible bonds offer investors equity-like returns with a risk profil...NN Investment Partners
NN Investment Partners explains how convertible bonds offer investors equity-like returns with a risk profile comparable to that of bonds, from November 2015.
Diversification in asset class can reduce the risk and also can generate defined return based on the inventor’s risk perception. Client’s objective to get post retirement cash flow, financing and refinancing of mortgage loan is successfully implemented here.
Risk and return is related get high importance in portfolio construction. From Markowitz’s concept of the mean –variance relationship and along with modern creation of synthetic fund, the risk aversion nature of investors gets importance. The return of the portfolio decreases with the diversification but portfolios from efficient frontiers satisfy the need of investors.
Compared to equities, bonds at first glance can appear like a throwback to your grandparent's days, but this month we take a look at how bonds may help mitigate risk, and the role they play in a well-diversified portfolio.
Bonds are a fixed income asset that provide investors with a range of risks and yields. Numerous types of bonds and bond financial instruments exist for investors to choose from. They are often considered a safe-haven asset during times of economic contraction because they and in some cases, provide tax protection.
Global bond markets fell in May and June, as investors contemplated the end of massive liquidity from the U.S. Federal Reserve’s bond-buying program. The fund’s overweight exposure to the strengthening U.S. dollar aided performance during the quarter, as did our holdings of commercial mortgage-backed securities. Our mortgage credit holdings and our allocation to high-yield bonds generated positive returns early in the period before investors began to shed risk in May, but the positions remained positive overall for the quarter. We have a generally positive outlook for global economic growth and are seeking to capitalize on opportunities in spread sectors exhibiting improved relative value.
Various Media Citations - Ryan Renicker, CFARYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Options Trade Cheap Following Q2 Earnings - 2005RYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Telecom / Media Overview - Buy-Write Google (GOOG)RYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Equity Derivatives Strategy - A Stock Picker's Market?RYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Technology Stocks: A Stock Picker's Market?RYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
How to Strengthen Portfolio Returns as the Dollar Weakens!RYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Stock Options on ANF and GPS - The Market's Expectation for Same-Store SalesRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Option Strategies for Power and Utilities IndustriesRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Options Strategy Monthly - 2006 - Low Volatility in the 7th Inning? Housing M...RYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Pinning of Stock Prices on Expiration Date - Equity OptionsRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
The Risk and Return of the Buy Write Strategy On The Russell 2000 IndexRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Option Strategies - Natural Gas Trading OpportunitiesRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
McDonald's Options are Trading Rich - Super Sized VolatilityRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Option Implied Volatility for Small Cap StocksRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Collar Strategies - Not Hedged - Profitable but Also RiskyRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Risk Premium in Options for the Energy SectorRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Stock Market Indices Trading in a Very Narrow Trading RangeRYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Weakening the Case for a "Summer Volatility Crush"RYAN RENICKER
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Seminar: Gender Board Diversity through Ownership NetworksGRAPE
Seminar on gender diversity spillovers through ownership networks at FAME|GRAPE. Presenting novel research. Studies in economics and management using econometrics methods.
how to sell pi coins effectively (from 50 - 100k pi)DOT TECH
Anywhere in the world, including Africa, America, and Europe, you can sell Pi Network Coins online and receive cash through online payment options.
Pi has not yet been launched on any exchange because we are currently using the confined Mainnet. The planned launch date for Pi is June 28, 2026.
Reselling to investors who want to hold until the mainnet launch in 2026 is currently the sole way to sell.
Consequently, right now. All you need to do is select the right pi network provider.
Who is a pi merchant?
An individual who buys coins from miners on the pi network and resells them to investors hoping to hang onto them until the mainnet is launched is known as a pi merchant.
debuts.
I'll provide you the Telegram username
@Pi_vendor_247
where can I find a legit pi merchant onlineDOT TECH
Yes. This is very easy what you need is a recommendation from someone who has successfully traded pi coins before with a merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi network coins and resell them to Investors looking forward to hold thousands of pi coins before the open mainnet.
I will leave the telegram contact of my personal pi merchant to trade with
@Pi_vendor_247
How Does CRISIL Evaluate Lenders in India for Credit RatingsShaheen Kumar
CRISIL evaluates lenders in India by analyzing financial performance, loan portfolio quality, risk management practices, capital adequacy, market position, and adherence to regulatory requirements. This comprehensive assessment ensures a thorough evaluation of creditworthiness and financial strength. Each criterion is meticulously examined to provide credible and reliable ratings.
2. Elemental Economics - Mineral demand.pdfNeal Brewster
After this second you should be able to: Explain the main determinants of demand for any mineral product, and their relative importance; recognise and explain how demand for any product is likely to change with economic activity; recognise and explain the roles of technology and relative prices in influencing demand; be able to explain the differences between the rates of growth of demand for different products.
how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
However, Pi Network has announced plans to launch its Testnet and Mainnet in the future, which may include listing Pi on exchanges.
The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
If you want to sell your pi coins, reach out to a pi vendor and sell them to anyone looking to sell pi coins from any country around the globe.
Below is the contact information for my personal pi vendor.
Telegram: @Pi_vendor_247
US Economic Outlook - Being Decided - M Capital Group August 2021.pdfpchutichetpong
The U.S. economy is continuing its impressive recovery from the COVID-19 pandemic and not slowing down despite re-occurring bumps. The U.S. savings rate reached its highest ever recorded level at 34% in April 2020 and Americans seem ready to spend. The sectors that had been hurt the most by the pandemic specifically reduced consumer spending, like retail, leisure, hospitality, and travel, are now experiencing massive growth in revenue and job openings.
Could this growth lead to a “Roaring Twenties”? As quickly as the U.S. economy contracted, experiencing a 9.1% drop in economic output relative to the business cycle in Q2 2020, the largest in recorded history, it has rebounded beyond expectations. This surprising growth seems to be fueled by the U.S. government’s aggressive fiscal and monetary policies, and an increase in consumer spending as mobility restrictions are lifted. Unemployment rates between June 2020 and June 2021 decreased by 5.2%, while the demand for labor is increasing, coupled with increasing wages to incentivize Americans to rejoin the labor force. Schools and businesses are expected to fully reopen soon. In parallel, vaccination rates across the country and the world continue to rise, with full vaccination rates of 50% and 14.8% respectively.
However, it is not completely smooth sailing from here. According to M Capital Group, the main risks that threaten the continued growth of the U.S. economy are inflation, unsettled trade relations, and another wave of Covid-19 mutations that could shut down the world again. Have we learned from the past year of COVID-19 and adapted our economy accordingly?
“In order for the U.S. economy to continue growing, whether there is another wave or not, the U.S. needs to focus on diversifying supply chains, supporting business investment, and maintaining consumer spending,” says Grace Feeley, a research analyst at M Capital Group.
While the economic indicators are positive, the risks are coming closer to manifesting and threatening such growth. The new variants spreading throughout the world, Delta, Lambda, and Gamma, are vaccine-resistant and muddy the predictions made about the economy and health of the country. These variants bring back the feeling of uncertainty that has wreaked havoc not only on the stock market but the mindset of people around the world. MCG provides unique insight on how to mitigate these risks to possibly ensure a bright economic future.
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1. October 12, 2005 Best Buy 2.25% due 01/15/22
Venu Krishna, CFA with Call Overwrites
1.212.526.7328
venu.krishna@lehman.com
An Attractive Risk-Adjusted Play on Best Buy
Brendan Lynch
1.212.526.8432 Best Buy’s stock (BBY) has come under pressure in the past few weeks. The stock closed at
blynch1@lehman.com $41.86 on 10/10/2005, 21% below its 52 week high of $53.17 on 07/28/2005.
The S&P 500 was down 4.5% over the same period.
Manoj Shivdasani
1.212.526.8428
mshivdas@lehman.com In this note we evaluate BBY’s 2.25% due 01/15/2022 convertible bonds with call
overwrites as an attractive risk-adjusted play on Best Buy. We have analyzed the trade over
three time horizons and with varying degrees of overwrites to help investors make a choice
based on their individual preferences and outlook.
3-month implied volatilities for BBY are trading at the higher end of their historical range on
both an absolute basis as well as in comparison to the market (S&P 500) and the S&P 500
Consumer Discretionary sector.
By selling calls at a higher implied volatility against a long convert position (28.9 implied
volatility), investors can monetize the higher volatility in the options market which appears
rich at current levels.
Given their attractive risk-reward profile, the fact that the returns are computed on a holding-
period basis (not annualized) and the overall risk-averse, uncertain, low return expectation
macro environment that we are currently in, we believe these trades are attractive and
Analyst Certification should appeal especially to investors looking for potential upside in a highly risk controlled
I, Venu Krishna, CFA hereby manner.
certify (1) that the views
expressed in this research report .
accurately reflect my personal
views about any or all of the
subject securities or issuers
referred to in this report and (2)
no part of my compensation
was, is or will be directly or
indirectly related to the specific
recommendations or views
expressed in this report.
Lehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Customers of Lehman Brothers in the United States can receive independent, third-party research on the company or companies
covered in this report, at no cost to them, where such research is available. Customers can access this independent research at
www.lehmanlive.com or can call 1-800-2LEHMAN to request a copy of this research.
Investors should consider this report as only a single factor in making their investment decision.
PLEASE REFER TO IMPORTANT DISCLOSURES BEGINNING ON PAGE 8
2. Best Buy 2.25% due 01/15/22 with Call Overwrites
Introduction
Best Buy’s stock (BBY) has come under pressure in the past few weeks. The stock closed at
$41.86 on 10/10/2005, 21% below its 52 week high of $53.17 on 07/28/2005.
Lehman Brothers fundamental research analyst Alan M. Rifkin believes that after an
impressive 1Q, 2Q results and management’s maintained full year guidance fell short of
investor’s expectations, which is why the stock has been weak. In our opinion, high oil
prices, an uncertain interest rate environment, lowered expectations on consumer spending
and the after effects of the hurricanes have also likely led to the decline of BBY’s stock
price. Lehman Brothers’ fundamental research stock and sector ratings remain positive at 1-
Overweight/1-Positive with a 12-month price target of $57.00 based on a 22x multiple of
2006 earnings estimate of $2.58 (including $0.11 of options expense).
In this note we evaluate BBY’s 2.25% due 01/15/2022 convertible bonds with call
overwrites as an attractive risk-adjusted play on Best Buy. We have analyzed the trade
over three time horizons and with varying degrees of overwrites to help investors make a
choice based on their individual preferences and outlook. Also, we have chosen option
contracts that are relatively liquid for ease of execution.
~3 month – short term to include near-term preliminary data on holiday season spending
and to end coincidentally with the 01/21/06 options expiry date
~5 month – medium term to include actual reported results for the holiday season and to
end coincidentally with the 03/18/06 options expiry date
~15 month – relatively longer term till the first put/call date (01/15/2007) on the bonds
(options expire on 01/20/07)
1
According to our Equity Derivatives Strategy Team 3-month implied volatilities for BBY are
trading at the higher end of their historical range on both an absolute basis as well as in
comparison to the market (S&P 500) and the S&P 500 Consumer Discretionary sector.
Since the Company is next scheduled to report earnings in December, the recent run up in
risk expectations seems to be driven more by factors discussed earlier.
By selling calls at a higher implied volatility against a long convert position (28.9 implied
volatility), investors can monetize the higher volatility in the options market which appears
rich at current levels. For example, the $47.5 strike 1/21/06 expiry calls have an implied
volatility of 34.6% and the $50 strike calls with the same expiry have an implied volatility
of 33.1% The $50 strike, longer dated calls expiring in January 2007 too have an
implied volatility of 30.7% which is 1.8 points higher than the implied volatility of the
convert.
1
Ryan Renicker and Devapriya Mallick.
2 October 12, 2005
3. Best Buy 2.25% due 01/15/22 with Call Overwrites
Figure 1: Listed Call Options Table (versus $42.00 Current Stock Price)
01/21/2006 03/18/2006 01/20/2007
Strike Bid # Contracts Size Imp. Vol Bid # Contracts Size Imp. Vol Bid # Contracts Size Imp. Vol
$46.25 - - - - - - - - $4.69 2754 150 30.6
$47.50 $1.33 1249 100 34.6 $1.89 490 100 32.8 - - - -
$50.00 $0.74 3990 100 33.1 $1.31 1850 100 32.6 $3.66 4294 100 30.7
$50.00 $0.74 7264 150 33.1 $1.31 434 150 32.6 $3.66 190 150 30.7
Source: Lehman Brothers
Figure 3: BBY Implied Volatility Trend versus S&P 500 and S&P 500 Consumer
Discretionary Sector
40%
BBY 3m Imp Vol
35%
30%
25%
Sector Avg Imp Vols
20% (Consumer
Discretionary)
15%
10%
SPX 3m Imp Vol
5%
0%
4
5
5
04
5
5
5
5
05
5
05
4
-0
-0
-0
-0
n-0
0
-0
0
c-0
ct-
p-
-
b-
g-
ar
r
ov
ay
Jul
Jun
Ap
De
Ja
Fe
Se
Au
O
M
N
M
Source: Lehman Brothers Equity Derivatives Strategy
We believe that the trades discussed below have a defensive yet attractive risk-reward
profile and are likely to appeal to investors seeking to participate in BBY’s potential upside
while significantly lowering downside risk. The rest of this report details out the potential
payoffs for various trades.
BBY 2.25% due 01/10/2022 Convertible
The key terms of the BBY 2.25% convertible are below. Note the relatively low risk
premium (high bond floor of 96.35). The converts have a conversion price of $46 and a
conversion ratio of 21.7391. In this section we analyze the total return of the convertibles
over the three horizon periods under different stock price scenarios and overwrite
strategies. The tables detail out the potential payoffs for trades that are long 1 bond
(@107.75 vs. $42.00) with varying degrees of overwrites and over different time
horizons. All payoffs are calculated in bond points and the percentage returns are for the
holding period.
October 12, 2005 3
4. Best Buy 2.25% due 01/15/22 with Call Overwrites
Figure 2: Best Buy 2.25% Convertible due 10/01/2025
Issue Income Call
Size Risk Pickup Yrs to Prot Theo % Rich/ Implied Libor Theo Vol/Credit
Bond (mln) Prem % Prem % CY (bps) Put (yrs) Convert Px Stock Px Value (Cheap) Vol OAS Delta Assump
BBY 2.25% 402.5 18.0 11.8 2.08% 133 1.3 1.3 107.750 $42.00 107.80 (0.05) 28.9 50 52 29 Vol / L+50
Source: Lehman Brothers
Figure 3: Short Term Horizon (1/21/06) - Long 1 BBY 2.25% Convert with Call Overwrites
Short term (1/21/06) - Long 1 BBY 2.25% with call overwrites
Horizon Stock Price $12 $30 $32 $34 $36 $38 $40 $42 $44 $46 $48 $50 $52 $54 $72
Stock Price % Chg (71.4%) (28.6%) (23.8%) (19.0%) (14.3%) (9.5%) (4.8%) 0.0% 4.8% 9.5% 14.3% 19.0% 23.8% 28.6% 71.4%
Estimated Cvt Px 97.05 98.57 99.34 100.34 101.59 103.09 104.88 106.91 109.19 111.72 114.46 117.41 120.55 123.85 158.42
Px Return (10.70) (9.18) (8.41) (7.41) (6.16) (4.66) (2.87) (0.84) 1.44 3.97 6.71 9.66 12.80 16.10 50.67
Cpn Return 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.63
Without Overwrite
Total Return (10.07) (8.55) (7.78) (6.78) (5.53) (4.03) (2.24) (0.21) 2.07 4.60 7.34 10.29 13.43 16.73 51.30
Total Return % (9.3%) (7.9%) (7.2%) (6.3%) (5.1%) (3.7%) (2.1%) (0.2%) 1.9% 4.3% 6.8% 9.6% 12.5% 15.5% 47.6%
Overwrite: Sell 20 $47.5 strike calls expiring on 1/21/06 @ $1.33 per call (34.6% implied volatility)
Call Premium 2.66 2.66 2.66 2.66 2.66 2.66 2.66 2.66 2.66 2.66 2.66 2.66 2.66 2.66 2.66
Call Payoff 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (1.00) (5.00) (9.00) (13.00) (49.00)
Total Return (7.41) (5.89) (5.12) (4.12) (2.87) (1.37) 0.42 2.45 4.73 7.26 9.00 7.95 7.09 6.39 4.96
Total Return % (6.9%) (5.5%) (4.7%) (3.8%) (2.7%) (1.3%) 0.4% 2.3% 4.4% 6.7% 8.4% 7.4% 6.6% 5.9% 4.6%
Overwrite: Sell 10 $47.5 strike calls expiring on 1/21/06 @ $1.33 per call (34.6% implied volatility)
Call Premium 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33
Call Payoff 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.50) (2.50) (4.50) (6.50) (24.50)
Total Return (8.74) (7.22) (6.45) (5.45) (4.20) (2.70) (0.91) 1.12 3.40 5.93 8.17 9.12 10.26 11.56 28.13
Total Return % (8.1%) (6.7%) (6.0%) (5.1%) (3.9%) (2.5%) (0.8%) 1.0% 3.2% 5.5% 7.6% 8.5% 9.5% 10.7% 26.1%
Overwrite: Sell 20 $50.0 strike calls expiring on 1/21/06 @ $0.74 per call (33.1% implied volatility)
Call Premium 1.48 1.48 1.48 1.48 1.48 1.48 1.48 1.48 1.48 1.48 1.48 1.48 1.48 1.48 1.48
Call Payoff 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (4.00) (8.00) (44.00)
Total Return (8.59) (7.07) (6.30) (5.30) (4.05) (2.55) (0.76) 1.27 3.55 6.08 8.82 11.77 10.91 10.21 8.78
Total Return % (8.0%) (6.6%) (5.8%) (4.9%) (3.8%) (2.4%) (0.7%) 1.2% 3.3% 5.6% 8.2% 10.9% 10.1% 9.5% 8.2%
Overwrite: Sell 10 $50.0 strike calls expiring on 1/21/06 @ $0.74 per call (33.1% implied volatility)
Call Premium 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74
Call Payoff 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (2.00) (4.00) (22.00)
Total Return (9.33) (7.81) (7.04) (6.04) (4.79) (3.29) (1.50) 0.53 2.81 5.34 8.08 11.03 12.17 13.47 30.04
Total Return % (8.7%) (7.2%) (6.5%) (5.6%) (4.4%) (3.0%) (1.4%) 0.5% 2.6% 5.0% 7.5% 10.2% 11.3% 12.5% 27.9%
Source: Lehman Brothers
The first overwrite trade presented above exemplifies the attractive risk-reward profile.
Should stock increase from the current $42 to $46 (+9.5%), we estimate the total return on
the trade to be 6.7%, an upside participation of 70%. And for a $4 decline in stock to
$38 (-9.5%), the total return on the trade is -1.3%, a downside participation of just 14%.
We find this 5:1 risk reward profile very attractive. Investors should note that the risk-reward
for this particular trade becomes less attractive for larger price changes and can tailor their
strategy according to their individual expectation on the stock and their risk-return
preferences. One can see that trades with a fewer number of higher strike overwrites (last
example) are likely to perform better should stock appreciate significantly.
4 October 12, 2005
6. Best Buy 2.25% due 01/15/22 with Call Overwrites
Figure 5: Long Term Horizon (1/15/07) - Long 1 BBY 2.25% Convert with Call Overwrites
Horizon Stock Price $12 $30 $32 $34 $36 $38 $40 $42 $44 $46 $48 $50 $52 $54 $72
Stock Price % Chg (71.4%) (28.6%) (23.8%) (19.0%) (14.3%) (9.5%) (4.8%) 0.0% 4.8% 9.5% 14.3% 19.0% 23.8% 28.6% 71.4%
Estimated Cvt Px 100.00 100.00 100.00 100.00 100.00 100.08 101.62 103.45 105.37 107.37 109.45 111.63 113.97 117.43 156.53
Px Return (7.75) (7.75) (7.75) (7.75) (7.75) (7.67) (6.13) (4.30) (2.38) (0.38) 1.70 3.88 6.22 9.68 48.78
Cpn Return 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88 2.88
Without Overwrite
Total Return (4.87) (4.87) (4.87) (4.87) (4.87) (4.79) (3.25) (1.42) 0.50 2.50 4.58 6.76 9.10 12.56 51.65
Total Return % (4.5%) (4.5%) (4.5%) (4.5%) (4.5%) (4.4%) (3.0%) (1.3%) 0.5% 2.3% 4.2% 6.3% 8.4% 11.7% 47.9%
Overwrite: Sell 20 $46.625 strike calls expiring on 1/20/07 @ $4.69 per call (30.6% implied volatility)
Call Premium 9.37 9.37 9.37 9.37 9.37 9.37 9.37 9.37 9.37 9.37 9.37 9.37 9.37 9.37 9.37
Call Payoff 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (2.75) (6.75) (10.75) (14.75) (50.75)
Total Return 4.50 4.50 4.50 4.50 4.50 4.58 6.12 7.95 9.87 11.87 11.20 9.38 7.72 7.18 10.28
Total Return % 4.2% 4.2% 4.2% 4.2% 4.2% 4.3% 5.7% 7.4% 9.2% 11.0% 10.4% 8.7% 7.2% 6.7% 9.5%
Overwrite: Sell 10 $46.625 strike calls expiring on 1/20/07 @ $4.69 per call (30.6% implied volatility)
Call Premium 4.69 4.69 4.69 4.69 4.69 4.69 4.69 4.69 4.69 4.69 4.69 4.69 4.69 4.69 4.69
Call Payoff 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (1.38) (3.38) (5.38) (7.38) (25.38)
Total Return (0.18) (0.18) (0.18) (0.18) (0.18) (0.10) 1.44 3.27 5.19 7.19 7.89 8.07 8.41 9.87 30.97
Total Return % (0.2%) (0.2%) (0.2%) (0.2%) (0.2%) (0.1%) 1.3% 3.0% 4.8% 6.7% 7.3% 7.5% 7.8% 9.2% 28.7%
Overwrite: Sell 20 $50.0 strike calls expiring on 1/20/07 @ $3.66 per call (30.7% implied volatility)
Call Premium 7.32 7.32 7.32 7.32 7.32 7.32 7.32 7.32 7.32 7.32 7.32 7.32 7.32 7.32 7.32
Call Payoff 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (4.00) (8.00) (44.00)
Total Return 2.45 2.45 2.45 2.45 2.45 2.53 4.07 5.90 7.82 9.82 11.90 14.08 12.42 11.88 14.97
Total Return % 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 3.8% 5.5% 7.3% 9.1% 11.0% 13.1% 11.5% 11.0% 13.9%
Overwrite: Sell 10 $50.0 strike calls expiring on 1/20/07 @ $3.66 per call (30.7% implied volatility)
Call Premium 3.66 3.66 3.66 3.66 3.66 3.66 3.66 3.66 3.66 3.66 3.66 3.66 3.66 3.66 3.66
Call Payoff 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (2.00) (4.00) (22.00)
Total Return (1.21) (1.21) (1.21) (1.21) (1.21) (1.13) 0.41 2.24 4.16 6.16 8.24 10.42 10.76 12.22 33.31
Total Return % (1.1%) (1.1%) (1.1%) (1.1%) (1.1%) (1.0%) 0.4% 2.1% 3.9% 5.7% 7.6% 9.7% 10.0% 11.3% 30.9%
ySource: Lehman Brothers
Summary
Given their attractive risk-reward profile, the fact that the returns are computed on a holding-
period basis (not annualized) and the overall risk-averse, uncertain, low return expectation
macro environment that we are currently in, we believe these trades are attractive.
We suggest the following process to determine an optimal strategy:
First define the time horizon i.e. short term, medium term or a slightly longer term.
Second, arrive at a stock price estimate over the holding period. This will help in choosing
the appropriate overwrite strategy. For instance if investors feel that the stock is not likely to
rise above $47.50 over the holding period then they may consider writing calls with that
strike.
And third, determine the preference for income versus potential appreciation. If investors
prefer greater income and don’t mind giving up the upside beyond the call overwrite
threshold, they could potentially write more number of calls at lower strikes for each long
convert position.
6 October 12, 2005
7. Best Buy 2.25% due 01/15/22 with Call Overwrites
While we believe that the risk in our suggested trades is rather limited there are some risk
factors that investors should be aware of. We have assumed that the convertible bond can
be sold in the secondary market at its theoretical value. If the bonds cheapen returns could
be lower. If the volatility of BBY decreases and/or credit spreads widen and/or interest
rates rise and/or BBY raises its common dividend, investors are likely to realize a lower
return than what is presented in our analysis. However, the relatively short dated 1.3 year
put on the bonds limits the effect of these risk factors.
In conclusion, we believe Best Buy’s convertible bonds overlaid with an overwrite strategy
present several defensive yet attractive trade alternatives in the current uncertain
environment. We believe these will appeal especially to investors looking for potential
upside in a highly risk controlled manner.
October 12, 2005 7
8. FOR CURRENT IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE
SUBJECT OF THIS RESEARCH REPORT, PLEASE SEND A WRITTEN REQUEST TO:
LEHMAN BROTHERS CONTROL ROOM
745 SEVENTH AVENUE, 19TH FLOOR
NEW YORK, NY 10019
OR
REFER TO THE FIRM'S DISCLOSURE WEBSITE AT www.lehman.com/disclosures
Important Disclosures:
The analysts responsible for preparing this report have received compensation based upon various factors including the Firm’s total revenues, a portion of which is generated by investment banking activities.
Convertibles Risk Disclosure(s):
The convertible valuations are based on Lehman’s proprietary convertible valuation model, under which key assumptions relate to credit spread and volatility metrics. Material changes in any of these variables can
have a significant impact on valuation. Upside/downside analysis takes into consideration likely future valuation and expected trading patterns, among others. It is based on a total return participation of the
convertible relative to a +/- 25% change in the common stock’s price over a one-year investment horizon. A material change in the company’s financial situation can significantly alter this assessment.
Mentioned Stocks
Best Buy (BBY - USD41.86) 1-Overweight / Positive J/K/M
Risks Which May Impede the Achievement of the Price Target: 1. If Circuit City is promotional, Best Buy's sales and earnings could be negatively impacted. 2. If problems arise with the integration of Future Shop,
Best Buy's earnings could be negatively impacted. 3. If prerecorded music sales decline, Best Buy's sales could be negatively affected.
Disclosure Legend:
J: Lehman Brothers Inc. or an affiliate trade(s) regularly in the shares of the subject company.
K: Lehman Brothers Inc. has received non-investment banking related compensation from the subject company within the last 12 months.
M: The subject company is or during the last 12 months has been a non-investment banking client (securities related services) of Lehman Brothers Inc.
Valuation Methodology:
BBY shares currently trade at 19.5x and 16.5x our 2005 and 2006 EPS estimates of $2.18 and $2.58 (including $0.11 of options expense), respectively. Our 12-month price target of $57 is based on a multiple
of 22x our 2006 estimate. The shares currently trade at an 8% premium to the S&P 500, based on our 2006 estimate, having traded between a 34% discount and a 40% premium to the S&P 500 over the past
five years. We maintain our 1-Overweight rating on the shares, as we believe the potential exists for BBY shares to outperform the unweighted expected total return of the retail industry over the next 12 months.
Guide to Lehman Brothers Equity Research Rating System:
Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2- Equal weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team
of analysts that are deemed to be in the same industry sector (“the sector coverage universe”). To see a list of companies that comprise a particular sector coverage universe, please go to
www.lehman.com/disclosures.
In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions below). A rating system using terms such as buy,
hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.
Stock Rating
1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.
2-Equal weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.
3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.
RS-Rating Suspended - The rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Lehman Brothers is acting in an
advisory capacity on a merger or strategic transaction involving the company.
Sector View
1-Positive - sector coverage universe fundamentals are improving.
2-Neutral - sector coverage universe fundamentals are steady, neither improving nor deteriorating.
3-Negative - sector coverage universe fundamentals are deteriorating.
Distribution of Ratings:
Lehman Brothers Equity Research has 1758 companies under coverage.
42% have been assigned a 1-Overweight rating which, for purposes of mandatory disclosures, is classified as a Buy rating, 35% of companies with this rating are investment banking clients of the Firm.
41% have been assigned a 2-Equal weight rating which, for purposes of mandatory disclosures, is classified as a Hold rating, 7% of companies with this rating are investment banking clients of the Firm.
17% have been assigned a 3-Underweight rating which, for purposes of mandatory disclosures, is classified as a Sell rating, 84% of companies with this rating are investment banking clients of the Firm.
This material has been prepared and/or issued by Lehman Brothers Inc., member SIPC, and/or one of its affiliates (“Lehman Brothers”) and has been approved by Lehman Brothers International (Europe),
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