Fiduciary Call – An Option Trading Strategy rarely used

Fiduciary Call is a simple option trading strategy which can be used by beginners aswell. This is not a very well-known strategy, hence, it is rarely used.

Know everything about this option trading strategy here.


About Fiduciary Call

Fiduciary call is an approach that can be implemented by an investor. It is provided that they possess the reserves to minimize the cost in applying a call option. This particular trading strategy can be beneficial to the investors, as it can be feasible.

It would also make it essential for the investors to have the initial amount. They can use it to deploy the fiduciary call option strategy.

If one observes closely, they will understand that the fiduciary call option is quite similar to buying a standard call option.

It comes with one slight exception that they invest preset strike value in a no-risk account bearing interest.


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Basics of the Fiduciary Call

The investor wishes to buy some stocks, and they possess the required funds to purchase that amount of stock.

But in this case, instead of utilizing the entire fund, they acquire the calls on that stock. By doing this, they keep aside a portion of the funds to handle the required premiums.

One invests the remaining fund amount in a low-risk money market. The fiduciary call option demands the investor to have spare funds available. It is to collaborate in the low-risk account until the expiration of that option.

The fiduciary call option limits the risk. It does so by ensuring that if the stockholder exercises the choices, there will be share or cash.

It is instantly ready for delivery. Since no party needs to participate in open market transactions, there will be no market risk.

The investor purchases a fiduciary call option, and it increases the comfort level of the investor in the trading process, as there will be no uncertainty about the money or funds being ready for utilizing the options and lowering the risk.

To create a fiduciary option call, you need to purchase the money calls based on the stock in which you want to invest.

Later, if you were genuinely going to buy the assets, you may entrust the required balance capital amount and put it in a no-risk account.

A fiduciary call expects the investor to have the superfluous cash available to tie up in the no-risk record until the termination of the option.


Example of Fiduciary Call Option Trading Strategy

Let’s understand how a fiduciary call works better with the help of an example.

Suppose you are planning to buy one thousand shares of stock of company A when it is trading at Rs.450, but company A chooses to opt for a fiduciary call.

In the money calls on Company A’s stock, with a striking amount of Rs.450 and are trading at Rs.30, so the amount spent is Rs.30000 to cover the one thousand shares instead of paying Rs.450000, which the company A would have to pay directly to buy those one thousand shares.

This method gives a balance of Rs.420000 that is better than what it would have cost the company A to buy those shares. Now, one can easily invest this amount of Rs.420000 into an account.

The main motive behind this is that, by the time of the options expiration, company A will have made a handful of interest to at least recover the cost of buying them.

If they expire without any worth, then Company A will have offset some of the loss, and if Company A is fortunate and they run out of money, then company A will have balanced some portion of the cost of exercising them.

This practice increases the profit of the company and helps in the growth of the company as well.


Fiduciary Deposits

These deposits are a financial product from Switzerland. They are also available to customers of Gibraltar- based banks. It is a deposit that the customer places with a recipient bank from a different agent bank.

Then, the recipient bank will be paying the agent bank the interest liable on the collateral, and the payee gets this interest.

The recipient bank treats the deposit they receive as an interbank placement and not a customer deposit.


Treatment of Fiduciary Deposits

As fiduciary deposits are treated as interbank placements, and puts the ultimate depositor at a very crucial disadvantage, over other depositors of the same bank.

When one takes the fiduciary agreement into account, the depositor assumes all the risks associated with the recipient bank failing which the depositor has no authority over the recipient bank holding his deposit.


Customer’s understanding of risk

The banks are required to ensure that the customers are aware of all the potential risks involved before entering into a fiduciary deposit.

The concerned banks should prior make their customers understand that they will not get any recourse to any deposit insurance arrangement when they have made up their mind about entering into the fiduciary deposit arrangement.

There is a requirement of proper documentation and clauses to highlight all the potential risks.


Similar Trading Strategies

Covered call

It is a substitute for the Fiduciary call option strategy that limits risk. Covered call strategy assures that if the owner exercises the right, the desired stock will be instantly accessible for transmission of service, money, or other securities.

In a covered call, there is no association of added risks. The party should participate in allowable exchange activities.

Fiduciary call strategy induces a level of comfort for the investors as there will be no conjecture regarding the funds being readily available to evaluate the option.

This approach is different from the covered call, in which the investor pre owns the stocks. Also, a covered call is a profit-making trading strategy that makes income at the cost of confining the upside potential for the shares.

Protective put

It is another similar strategy, as it starts with the original stock. It starts along with a put option with a secure position.

In case the stock price reaches over the actual strike price, then you can market the low-risk asset one then buy those shares at the strike value.

Your gain comprises the contrast between the market price and strike price, subtracted by the expense of the offer.


Fiduciary call relationship with Protective put or Married Put

A Married put option is a strategy where you can buy puts points. It is to secure your stock from losses extending the strike price of the put options. For this, you pay the expense, like any monthly insurance premium amount.

If you know the “Protective or Married put strategy”, then the Fiduciary call option is doable. It is a method of attaining the same payoff profile with considerably lesser money.

With the put, you own the shares, so if they change, you make the put lapse insignificantly. You have the portions estimated at the higher amount minus the bonus you spent for the put.


Example of Fiduciary call against Protective put

Assume a Company X is trading at Rs 30 per share, its December Rs 30 call option is trading at Rs 0.80 and December Rs 30 Put option is trading at Rs 0.80

Protective put-

Assuming you own 100, Company X shares Rs 30 per share. You buy one contract of Company X December 30 Put for Rs 0.80

Total cost of position = (Rs 30 x 100) + (Rs 0.80 x 100)

= Rs 3080

Fiduciary call-

You buy one contract of Company X December 30 call for Rs 0.80

Total cost of position = (Rs 0.80 x 100) = Rs 80

Now, you might be thinking that what is the difference between a Fiduciary call and a Long call option strategy? The answer to this question is that there is no difference as such. It is because both the trading strategies comprise of buying call options.

The significant difference is in the number of call options we purchase. It also deals with the motive behind the purchase.

Long ago, when only the call options were in trade in the exchanges and not put options, the investors then manufactured the put options. It is for the security of a portfolio through the utilization of Fiduciary calls, influenced by the principles of Put-call parity.


Fiduciary Call: Conclusion

Most fiduciary calls are European options, which are useful only at expirations. This strategy is also probable with American options if the investor can intelligently determine the time to execute the option.

The investor must meet the proportion of the risk-free account with the exact date to apply the option. We do not require options to understand the complications.

Once you have grasped and analyzed all the basic concepts, it gets easier. Options can provide opportunities when used effectively and, when one uses them clumsily, they can tend to be harmful.


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