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As of February 9, Bovespa will start trading the POP – Proteção do Investimento com Participação (Protected Participative Investment), a new structured product that provides protection against adverse price variation on the stock market.
The POP is a standardized equity product,Exchange-traded, with predetermined levels of capital protection. POP combines three financial operations: buying shares in the cash market, buying a put option and selling a portion of a call option.
This combination allows investors to determine an amount of capital they want to protect and a percentage of the potential gains they are willing to give up to have this protection.
A structured product previously available only for qualified investors, POP will be now offered at BOVESPA to the general public. The objective of launching POP is attract retail investors that want to invest in stock but do not want to incur the risks of an adverse price behavior in the market.
Initially, the POP will be available for eight securities. Click on the name to check the series that will start trading on February 9: Petrobrás PN, Vale do Rio Doce PNA, Bradesco PN, Usiminas PNA, Telemar PN, Itaubanco PN, Siderúrgica Nacional ON and PIBB CI (ETF based on the IBrX-50).
For all of them, investors will have available 6 and 12 months expiration terms and, based on the quotes of the stock in the cash market of February 9, series with 100% and 90% of the capital protected, in case of a downward market and, corresponding to 70% and 80% participation on the upside of the market.
It is important to note that the investor can trade and hold the POP as an single product or hold and trade each individual component, the share, the call or the put, separately, in this case, the protection may no longer exist as originally structured.
The expiration date of the POP will follow those of the options market. If at the POP expiration date, the price of the underlying share drops, the investor exercises the put option and receives the amount of protected capital in cash. On the other hand, in case the price of the stock rises, the investor is exercised on the call, and then, must sell part of the shares owned at the predetermined strike price corresponding to the assigned share profiting percentage.
POP - how does it work?
As an example, suppose a given stock X quoted at R$ 50.00 and there is a POP of the same stock with capital protection of R$ 45.00 at BOVESPA (so 90% of the capital protected), with 80% of participation on the upside of the market and a term of 6 months. Also suppose the investor bought 1,000 units of this POP at R$ 49.00 per unit. Therefore he will have R$ 49,000.00 invested. In this POP, the investor bought 1,000 shares of X, bought 1,000 puts of X and sold 200 calls of stock X, considering that both options have a strike price of R$ 45.00.
Imagine now two hypothetical situations on the maturity date of this POP, 6 months later:- The stock X is quoted at R$ 30.00. That means that it did not have the appreciation initially expected and so, the investor will exercise the put option and get back the value of your protected capital, i.e., R$ 45,000.00 (45.00 x 1,000); or
- The stock X is quoted at R$ 70.00. This means that it had the appreciation and, in addition to the capital originally invested, the investor will earn 80% of the excess return. In other words, the investor will be exercised on the call option and will sell part of its stocks at the strike price and, eventually sell the rest of the stocks at the market price and will get back R$ 65,000.00, resulting from {1,000 x [45.00 + 0.8 x (70.00 - 45.00)]}.
Finally, CBLC also acts as Central Counterpart in POP trading operations and since POP is an equity market product, international investors are exempted from tax on capital gains on POP operations.
Benefits of the POP
Advantages: protection, liquidity, diversification of investments, accessibility, transparency and flexibility, since a POP can be traded at any time as a single product or it can be split up in its parts. The investor can, for example, retain a security on the spot market and dispose of the options. However, it should be emphasized that in the event of selling off an option and keeping the stock, the investor will no longer enjoy the protection of this type of investment.
Price: The price of the POP will depend on the price of the reference share in the cash market, the level of protection intended (100% or 90%) and the percentage of profit sharing (20% or 30%) Therefore, it could be more or less than the price of the stock which serves as a reference. Moreover, its price quotations will depend on the term and the volatility of the reference stock and the prevailing market interest rates.
Dividends: Whenever investors acquire a POP, they are buying the respective stock. Therefore they will be entitled not only to the dividends paid out by the stock issuing company but they will also enjoy all the other benefits extended to stockholders (interest on shareholders’ equity, subscription rights, bonuses etc.). It should be emphasized that in these situations, the value of the protected capital will be adjusted to reflect these forecast gains.
Redemption: A POP can be purchased or sold at any time they and in any amount (in compliance with the minimum trading lot). Investors can also split up the POP and trade each individual component, in that case, the protection is no longer guaranteed as in the original structure.
