Winnebago

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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.

 

Why?

  1. 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.

  2. 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)

    2 possibilities:

    1. 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.
    2. 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).

  3. 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

Regards

Jean-Paul Giacometti

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  • Claret Asset Management specializes in offering portfolio management services to high net worth clients. We are completely independent and free of conflicts of interest. Claret was founded in 1996 with the objective of answering the growing needs of private investors.

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