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Everything You Need to Know About a Fiduciary Call

15 Jun 2023

Introduction

  • Do you want profits similar to the returns earned through high-risk and capital-intensive profit margins while keeping your investment at a minimum?
  • A fiduciary call can help you earn these profits. There are a myriad of call options and strategies for investors who desire a minimisation of risks.
  • A fiduciary call is one such strategy that allows traders to minimise risk and lower costs.

What is a Fiduciary Call?

A fiduciary call is a strategy to trade options and is quite similar to purchasing a traditional call option. The only difference is the strike price, which, instead of being used to buy the assets upfront, would be invested where it would generate interest. It often acts as a replacement for a protective put, which is costlier and also demands a bigger supply of capital. A fiduciary call reduces the inherent cost of exercising a call option. 

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How Does a Fiduciary Call Work?

  • The word 'fiduciary' refers to the trust between a trustee and a beneficiary. The general concept of a fiduciary call is similar to the essence of what the word stands for.
  • The investor does not dump all the funds to purchase stock upfront. Instead, he purchases calls on the stock with only a small part of the capital.
  • The rest of the funds are deposited into an interest-bearing account. This is either a risk-free or an extremely low-risk investment. 
  • Eventually, when the option expires, this account will have produced enough capital to cover the whole, or at least a part, of the cost of exercising the option.
  • On the other hand, if the investor decides not to exercise the option, the losses that he would have incurred due to the premium required to initiate the strategy can be covered by the interest generated. 

What are the Benefits of Using a Fiduciary Call?

A fiduciary call has multiple benefits when contrasted with a traditional call or a protective put. The two key benefits are:

  1. Cost-effectiveness: The investor puts the larger part of the capital into a low-risk investment. Hence, they do not hold the assets while the maturation happens. Thus, they are exempt from paying brokerage fees and taxes that they otherwise would have had to pay if they held the asset. 
  2. Low initial investment: At the start, a fiduciary call does not demand a high investment because a sizeable portion of the capital is acquired through the interest generated. 

What are the Factors to Keep in Consideration for a Fiduciary Call?

Investors must keep the following variables in mind while initiating a fiduciary call:

  1. Capital generation and period: Investors need to calculate the time it will take for the account to mature and be usable for the overall transaction. They should be mindful that the capital generated can cover the cost at the expiration of the option. The investor must take care to match the amount produced by the non-risk account at maturity to the capital required for acquiring the stocks.
  2. Some capital on hand: In case the investor is not able to or is not sure that he will be able to cover the costs with the interest generated, he should always keep some extra capital on hand.

Closing Thoughts

  • To sum up, a fiduciary call is an extremely safe strategy that minimises risk as well as the cost to a large extent.
  • The cost is reduced during the initiation of the strategy, at the very least.
  • It covers investors in case they do not wish to exercise the option at expiration as well. While they do require some knowledge of the market, these options are still on the simpler side.
  • This strategy does not require too many complex calculations, which makes it a great option not only for beginners but for experts as well. 

 

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account

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