Sales Commission Research Articles

Models for Call Option Decisions

THE PURPOSE OF THIS PAPER iS to develop models for buying and selling options. The paper is presented from the point of view of call options, but the methodology could be modified for puts, straddles and spreads. The valuation process yields the expected value of a call option as estimated on the day of valuation, which can be at any time before or after acquiring it, before its expiration. The process can be used for decisions on purchasing call options, or for decisions on holding, exercising, or selling call options already owned. A call option is quoted terms of contract price, expiration date, and price of call. Options are usually written lots of 100 shares. If the holder of a call option chooses to exercise the call on any day on or before the expiration date, he receives the stock at the contract price, paying the sales commission. He typically then sells the stock at market price, receiving market price less (another) sales commis.sion. There are small taxes involved buying the option initially, and exercising it. The. holder of the call option receives any dividends paid before the option is exercised. We consider the. case where the decision maker plans to exercise the call option and sell the stock, thus paying two sales commissions. Valuation before purchase of a call option involves assessing the expected value of the option and comparing it with the price of the option. If the expected value is greater than the price, the decision maker should typically be willing to buy the call option. Valuation of a call option already owned involves deciding whether to hold the option, exercise the option, or sell the option at an offered price. At any time during the length of the option (up, to the last two weeks or so, usually) there may be a m.arket for the option, particularly if it is in the money and the issue is volatile at the time. If the expected value of holding the option is greater than the known values of exercising or selling, the decision maker should typically be willing to hold the call option. He should choose the course of action with the highest value to him.

Communications and Notes

Insurance against the loss of one's investment in open-ended mutual fund shares is new on the American insurance scene.1 It is marketed only by Harleysville Mutual Insurance Company, and is available to investors in those mutual funds that have entered into an agreement with Harleysville. The insurance guarantee can be summarized as follows: the investor is guaranteed that at the end of 10 years the investment will equal at least the amount of the original outlay (including the sales commission) plus the direct cost of the insurance program (8 percent of original outlay).2 What the guarantee amounts to is an opportunity for the investor to seek the sometimes abundant returns of the stock market through the mutual fund medium while being completely shielded from downside risk.3 The primary purpose of this article is to evaluate the costs and benefits to the investor of this shield, with a secondary purpose being to speculate about what sort of underwriting performance the company may have. Methodology Harleysville introduced the mutual fund insurance product in 1971. The shortest guarantee period offered is 10 years. Consequently, it is impossible to evaluate past investor and insurer experience as none will be available

Antitrust in practice: The Case of Gasoline Marketing

This article reviews the application of the antitrust laws to the gasoline marketing industry, which has been the subject of much attention by enforcement officials. An examination is made of the application of the laws to exclusive dealing contracts, the refusal of refiners to deal with certain distributors, the sales commission system of marketing TBA , selective price cutting, and other practices. The conclusion is that, except as the laws have been applied to collusive pricing and mergers of competitors, they have failed to accomplish their objectives. The article also discusses the trade regulation rules proposed for the industry in 1965. These were rejected in July, 1967 by the Federal Trade Commission, which plans to apply the laws to the industry much as it has in the past.

Myths Associated with Closed-End Investment Company Discounts

CLOSED-END investment companies for the most part normally sell at a discount from asset value. These discounts vary and in some time periods are quite substantial. Such a discount pattern contrasts with mutual funds which sell at asset value plus a sales commission, ranging in many cases from 6% to 8%C/c. This article contends that where a closed-end investment company has a satisfactory performance record there is no mathematical or logical rationale for such a discount characteristic. The discounts are primarily the result of a lack of sales effort and public understanding. A CCORDING TO DEFINITION, a myth is a story attempting to account for something in nature. By myth man tries to rationalize an occurrence he cannot otherwise understand. He may do so in various ways, but normally all myths begin with a premise somehow based on fact. This premise is then woven into an invented fabric so the whole appears about as real as would normally be desired. The investment field has fostered many myths, some of which have been long-lived and even appear immortal. On this occasion I should like to prove false several of the myths attempting to rationalize discounts applied to Regulated Closed-End Investment Companies. Such discounts do not apply to mutual funds. More specifically, I refer to the discount from asset value at which most regulated closed-end investment companies normally sell. This is illustrated in the accompanying tabulation. The discount phenomenon stretches back many years in time and may well be the aftermath of deflated illusion following the Great Crash. Prior to that time, the argument was often made that in many instances, superior closed-end investment company performance warranted premiums of 50% or more. In any case, the discounts of recent years have persisted for such a time that numerous rationalizations have developed to support their existence. Some argue the side of the built-in capital gains tax payable. Some feel the discount results from the cost (applied against income) of running an investment company. Others point to the lackluster performance of certain funds in various time periods. Some feel a basic unawareness by investors of closed-end funds is the reason. Let me dispatch these one by one. Built-in-Capital Gains Liability-Myth The first rationale, the matter of unrealized capital gains, has several things to recommend it, not the least of which is general acceptance by the investment community. It also sounds vaguely analytical, which may account for some of its appeal. But beyond this, it has little to offer for a very simple reason. It is wrong. To begin with, I am sure all will agree that irrespective of the amount of unrealized appreciation in an investment company there is no actual tax liability until gains are realized. This being the case, it does not make much difference whether unrealized appreciation accounts for as much as 95% or as little as 5 % of a company's net assets as long as the gains which are realized and distributed each year are of modest pro

Administrative Law. Restraint of Trade. FTC Commissioner Disqualified for Appearance of Bias. Oil Company Promotion to Its Dealers of Rubber Company's Products in Return for Sales Commission Is Not Illegal If Dealers Are Not Actually Coerced. Texaco, Inc. v. FTC (D. C. Cir. 1964)

Administrative Law. Restraint of Trade. FTC Commissioner Disqualified for Appearance of Bias. Oil Company Promotion to Its Dealers of Rubber Company's Products in Return for Sales Commission Is Not Illegal If Dealers Are Not Actually Coerced. Texaco, Inc. v. FTC (D. C. Cir. 1964)