When to Hedge a Reverse Convertible Note (RCN)
A Reverse Convertible Note (RCN) is a short-term investment vehicle linked to an underlying common stock, sharing some of the characteristics of both bonds and stock. Premock Financial in South Florida uses RCNs as part of an investment strategy that provides clients with a “Defensive Asset Allocation Solution.” One of the primary benefits of an RCN is its high coupon payments with payoffs which are dependent upon the equity markets. When an RCN matures, investors may receive either the full amount of the original investment or a predetermined number of shares of the common stock to which it is linked, as well as the fixed income payments.
Premock Financial in South Florida advises that if an RCN is trading at or near resistance (the top of the box) at issuance, a Put option hedging position is immediately attached to the RCN in order to protect against the possibility of a stock price decline. When at a resistance level a stock price has a better chance that it might push the stock lower, which increases the risk of the stock price plunging below an RCN downside barrier which if this occurs investors will then receives the predetermined number of shares which is usually less than the value of the original investment.
However, if a hedging position is in place at the resistance level and the stock price pushes above that level, the hedging position will begin to decrease in value. This potentially decreases the total rate of return from the RCN stated coupon rate. Stop losses therefore protect every RCN hedge used by Premock Financial in South Florida. When used appropriately, RCN hedging positions only mainly threaten the total rate of return, rather than the principal. If the stock price cannot break through the resistance level and does not close below the downside barrier, it’s also possible for the hedging position to earn additional profit as well.
If the underlying stock that is linked to the RCN is trading at or near the support level at issuance, according to Premock Financial in South Florida, a hedging position will not be immediately attached. When a stock trades low to support, it is likely that the RCN will not breach the downside barrier. Chances are that the stock price will bounce off the support level.
If the underlying stock of an RCN is trading more or less between resistance and support levels at issuance, there is really not any immediate need for a hedging position. The downside barrier protection usually suffices to allow for price fluctuations between strike and trigger prices. If, however, the downside barrier is breached, especially if there is a high spike in volume, a hedging position will then be attached. This will help offset the principal loss if the stock price continues to decline in value and does not recover to stock strike price or the price which the stock was trading at when the RCN was issued before maturity.
Premock Financial South Florida – If you are looking for ways to manage your wealth, including well defined financial planning opportunities, Premock Financial in South Florida provides customized and risk-controlled wealth management solutions to meet the demands of investors who want to have access to sophisticated investment solutions with the potential to improve risk-adjusted returns. Please contact Premock Financial via the web at http://premockfinancial.com/ or follow us on Twitter at https://twitter.com/#!/MockTrade or https://twitter.com/#%21/MockTrade.
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