How do I create a structured product for myself to track the S&P 500 Index?
Question:
I would like to know how exactly to create a structured product that offers 100% principal protection and that tracks the S&P 500 Index over let's say a 5 year period. I know that step one would be to buy 5-year Treasury zero-coupon notes with a total face value equal to the principal I am investing. The next step, I think, is to using the remaining principal to buy a 5-year call with a strike price equal to today's index value. Am I correct? Thanks
Answer:
What you are trying to do is a funded structure. A 5-year treasury zero coupon notes is available as a strip and it is not usually the cheapest. However, your nominal principal will be protected, but as you know there are many other risks to the zero-coupon issues. Zero coupon reduces reinvestment risks as you might know that there are many other risks that could affect the value of money.
Buying a 5-year call on the S&P500 with a strike price close to today's index value will not be cheap either. I looked at the Dec09 S&P500 1400 call and it is priced at $190.00.
My Opinion is that such a strategy works well at the bottom of a correction, but as many headlines today mention that "The stock market had gone more than 45 months without a drop of more than 2 percent in a single session" (Tim Paradis, AP Business Writer).
Therefore, as you described it, this strategy will reap the benefit of the S&P500 when there is an appreciation in the value of the index. If the S&P doesn't reach the 1590 limit within 2 years, then the total return on the strategy will be less than the return on the risk free rate.
I think that you should look at this structure from an asset and liabilities prospective. In the asset column, you have the zero coupon treasury and the call option. What is your liability? Here is what is missing. Most institutional investors, as you mention try to balance their balance sheet by keeping them at equal duration which means that not only the assets and liabilities should balance but also the timing of the liabilities should match the timing of the assets. So to make it short, there is something that you need to sell and receive a premium for in the liability column that would have the same duration of your asset column.
I would keep this as an academic exercise for now.
Hope this helps
Boudames
If you do calls now you most likly will lose money I would do another stratagie with some puts. I really don't understand your question. Have you tried online trading most of that is reall cheap or free take alook at Trade King.
The best solution is just to buy the option. It is a leveraged product (one option of S&P is worth about $130K of notional) and you can buy a 3 year option for less than $200.00 USD.
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