592 Part V: Index Options and Futures 
day the products were sold to the public. Thus, the structured product itself has a 
"strike price" equal to that of the calls. It is this price that is used at maturity to deter­
mine whether the S&P has appreciated over the seven-year period - an event that 
would result in the holders receiving back more than just their initial purchase price. 
After the initial offering, the shares are then listed on the AMEX or the NYSE 
and they will begin to rise and fall as the value of the S&P 500 index fluctuates. 
So, the structured product is not an index fund protected by a put option, but 
rather it is a combination of zero-coupon government bonds and a call option on an 
index. These two structures are equivalent, just as the combination of owning stock 
protected by a put option is equivalent to being long a call option. 
Structured products of this type are not limited to indices. One could do the 
same thing with an individual stock, or perhaps a group of stocks, or even create a 
simulated bull spread. There are many possibilities, and the major ones will be dis­
cussed in the following sections. In theory, one could construct products like this for 
himself, but the mechanics would be too difficult. For example, where is one going 
to buy a seven-year option in small quantity? Thus, it is often worthwhile to avail one­
self of the product that is packaged (structured) by the investment banker. 
In actuality, many of the brokerage firms and investment banks that undetwrite 
these products give them names - usually acronyms, such as MITTS, TARGETS, 
BRIDGES, LINKS, DINKS, ELKS, and so on. If one looks at the listing, he may see 
that they are called notes rather than stocks or index funds. Nevertheless, when the 
terms are described, they will often match the examples given in this chapter. 
INCOME TAX CONSEQUENCES 
There is one point that should be made now: There is "phantom interest" on a struc­
tured product. Phantom interest is what one owes the government when a bond is 
bought at a discount to maturity. The IRS technically calls the initial purchase price 
an Original Issue Discount (OID) and requires you to pay taxes annually on a pro­
portionate amount of that OID. For example, if one buys a zero-coupon U.S. gov­
ernment bond at 60 cents on the dollar, and later lets it mature for $1.00, the IRS 
does not treat the 40-cent profit as capital gains. Rather, the 40 cents is interest 
income. Moreover, says the IRS, you are collecting that income each year, since you 
bought the bonds at a discount. (In reality, of course, you aren't collecting a thing; 
your investment is simply worth a little more each year because the discount decreas­
es as the bonds approach maturity.) However, you must pay income tax on the "phan-