An options strategy that involves the sale of call or put options on stocks that are believed to be overpriced or underpriced. The options are not expected to be exercised. Also referred to as overriding.
A type of covered-call strategy that consists of writing call options on stocks that the writer already owns to generate maximum current income from options premiums and dividends. The covered-call options strategy is achieved either by simultaneously purchasing the shares and writing options (known as a "buy-write") or by writing the options on shares that the writer already owns (the overwrite).Usually an investor with a market opinion of neutral to slightly bullish will employ this option writing strategy.
Specified dates when a bond issuer is required to redeem all or a portion of the outstanding issues of a bond prior to its maturity. The issuer might be required to redeem all or a portion of the bonds according to the call or prepayment provisions of the of the bond contract. |||Some types of mandatory redemptions occur either on a scheduled basis, or when a specified amount of money is available in the sinking fund. Bonds may be redeemed at a specified price, usually at par, and the bondholder will receive any accrued interest to the redemption date.
A measure of the potential dilution to which a common stock's existing shareholders are exposed due to the potential that stock-based compensation will be awarded to executives, directors or key employees of the company. It is usually represented in percentage form and is calculated as stock options granted, plus the remaining options that have yet to be granted divided by the total shares outstanding. There is no precise rule-of-thumb for determining what level of options overhang is bad for investors but, generally speaking, the higher the number, the greater the risk. If a company has a very high options overhang, it must generate even higher levels of growth in order to provide decent returns to investors net of the overhang's dilutive effects on investor returns.
A formula that expresses the measurable change in the value of a security in response to a change in interest rates. Calculated as:Where:n = number of coupon periods per yearYTM = the bond's yield to maturity |||Modified duration follows the concept that interest rates and bond prices move in opposite directions. This formula is used to determine the effect that a 100-basis-point (1%) change in interest rates will have on the price of a bond.
The most basic or standard version of a financial instrument, usually options, bonds, futures and swaps. Plain vanilla is the opposite of an exotic instrument, which alters the components of a traditional financial instrument, resulting in a more complex security. For example, a plain vanilla option is the standard type of option, one with a simple expiration date and strike price and no additional features. With an exotic option, such as a knock-in option, an additional contingency is added so that the option only becomes active once the underlying stock hits a set price point.
A slang term referring to a Government National Mortgage Association (GNMA) bond, which has a 15 year maturity. The midget is secured by mortgages backed by federal agencies. GNMA is also known as "Ginnie Mae". |||The GNMA was started in an attempt to make affordable housing available to lower income families. The term midget is a slang term used by dealers to refer to these bonds and it is not used by GNMA to formally describe any of its securities.
When a hybrid debt issue is subordinated to another debt issue from the same issuer. Mezzanine debt has embedded equity instruments (usually warrants) attached, which increase the value of the subordinated debt and allow for greater flexibility when dealing with bondholders. Mezzanine debt is frequently associated with acquisitions and buyouts, where it may be used to prioritize new owners ahead of existing owners in case of bankruptcy. |||Some examples of embedded options include stock call options, rights and warrants. In practice, mezzanine debt behaves more like stock than debt because the embedded options make the conversion of the debt into stock very attractive. Under U.S. Generally Accepted Accounting Principles (GAAP), how a hybrid security is classified on the balance sheet depends on how the embedded option is influenced by the debt portion. If the exercising of the embedded option is influenced by the structure of the debt portion in any way, then the two parts of the hybrid (debt and the embedded equity option) must be classified in both the liability and stockholders' equity sections of the balance sheet.
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