At the end of 2000, I spoke to many individuals about one of my favorite companies: WINNEBAGO (WGO)
- Average purchase price = $16 to $18
- Price today = $28.30
WGO has therefore increased in value by approx. 70% these past 7 months and now comprises a large position in the portfolios.
I wanted to inform you that I am going forward with the following transaction.
Sell Calls on WGO, strike price = $25, maturity = jan.2002 , in order to lower the weighting of WGO to 1.5% of the portfolios.
I will receive $5.80 per share as a premium.
WGO has reached our target price and the financial results of the company have not increased to justify such a hike in its share price.
By selling calls, I am obliged to sell the shares at $25 (at the choice of the option buyer). Most of the time, options are exercised in the last days of the contract. I will very likely be selling the WGO only next year and therefore pay the capital gains tax next year (not now)
- In January, WGO closes above $25. I will have to sell the shares at $25 and I still keep the $5.8 premium. The actual price received will be: $30.8 (25 + 5.8) which is 7.1% higher than the actual price of $28.3. Also, I will likely be selling the shares only next year.
In January, WGO closes below $25. I get to keep the shares and the premium of $5.80. My downside protection is (28.3 – 5.8) = $22.50. Another point, the premium is considered a capital gain and not revenue (and is taxable next year only).
A 70% performance while markets have been dropping between 5% and 15% is not a bad return to lock in !
I apologize for the complexity of the operation. I simply want to share with you a method of postponing a capital gain to next year, and a way to increase a little bit the $ received from a sale of a security.
If you would like more information, please feel free to contact me