Bernie Kanto

Dhiren Chetty

Assignment 8

In 2008 Bernie Kantor shocked the market when he obtained a zero cost asymmetric collar. A zero cost collar strategy involves purchasing a put and selling a call whereby the proceeds from the sale of the call options offset the cost of the put options. A zero cost collar is often used to secure in an appreciated share price by bracketing the payoff. Kantor purchased one million put options (strike price R40) and sold two million call options (strike price R50).

The following discussion identifies the three primary reasons for the market being shocked with this strategy employed by the CEO.

1) As explained, a zero cost collar is generally used to secure an appreciated share price and protect the share’s current price. One would not expect the CEO of a company to predict that its share price would not appreciate. This is almost counter-intuitive as one of the CEO’s goals would be to progress the company towards success, invariably increasing the share price.

2) By Kantor choosing to sell the call options at a strike price of R50, he needed to sell double the quantity of calls than he purchased puts - to fully pay for the put premium. This in itself was even more surprising for the market as the CEO was not only indicating that he thought that Investec’s share price had reached its high and was unlikely to increase during the term of the option, but that he was so sure of this that he was willing to take greater potential losses on the possibility of the share price going up. This creates an asymmetry in the zero cost collar payoff pattern and is called a bear zero cost collar.

3) Possibly most shocking of all was that Investec’s share had fallen from a price of R100. Given that the share price was R45 during the week that he obtained the zero cost collar, it was exceptionally surprising that Kantor thought that the price was appreciated given its massive drop from R100.

The above argument does not take into...