39 lines
3.1 KiB
Plaintext
39 lines
3.1 KiB
Plaintext
Otpt,r 32: Structured Products 617
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Note that his downside risk is not completely eliminated, though. The current
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prke of the structured product is 16.50 and the cash value at the current S&P price
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11117.14 (see the previous example for this calculation), so he has risk from these lev
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down to a price of $14.53.
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His upside is still unlimited, because he is net long two calls - the S&P 2-year
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1,,EAPS calls, struck at 1,200. The two LEAPS calls that he sold, struck at 700, effec
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tively offsets the call imbedded in the structured product, which is also struck at 700.
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This example showed how one could effectively roll the striking price of his
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structured product up to a higher price after the underlying had advanced. The indi
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vidual investor would have to decide if the extra downside protection acquired is
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worth the profit potential sacrificed. That depends heavily, of course, on the prices of
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the listed S&P options, which in turn depend on things such as volatility and time
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remaining until expiration.
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Of course, one other alternative exists for a holder of a structured product who
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has built up a good profit, as in the previous two examples: He could sell the prod
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uct he owns and buy another one with a striking price closer to the current market
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value of the underlying index. This is not always possible, of course, but as long as
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these products continue to be brought to market every few months or so by the
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underwriters, there will be a wide variety of striking prices to choose from. A possi
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ble drawback to rolling to another structured product is that one might have to
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extend his holding's maturity date, but that is not necessarily a bad thing.
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A different scenario exists when the underlying index drops after the structured
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product is bought. In that case, one would own a synthetic call option that might be
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quite far out-of the-rrwney. A listed call spread could be used to theoretically lower
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the call's striking price, so that upside movement might more readily produce prof
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its. In such a case, one would sell a listed call option with a striking price equal to the
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striking price of the structured product and would buy a listed call option with a
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lower striking price - one more in line with current market values. In other words,
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he would buy a listed call bull spread to go along with his structured product.
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Whatever debit he pays for this call bull spread will increase his downside risk, of
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course. However, in return he ~s the ability to make profits more quickly if the
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underlying index rises above the new, lower striking price.
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Many other strategies involving listed options and the structured product could
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be constructed, of course. However, the ones presented here are the primary strate
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gies that an investor should consider. All that is required to analyze any strategy is to
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remember that this type of structured product is merely a synthetic long call. Once
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that concept is in mind, then any ensuing strategies involving listed options can easily
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be analyzed. For example, the purchase of a listed put with a striking price essential- |