THE CLIENTS*

Many years ago, I began what would become a 30-year career with Merrill Lynch, during which I was primarily a bond broker/trader. 

Because I was located in a very affluent part of the country with a lot of investors in high tax brackets , I dealt primarily in  tax-free municipal bonds.

Interest rates were high during this period, with "munis" sometimes offering double digit tax-free yields. In states and cities with income taxes, these bonds were generally  more attractive than stocks.

Over the years, this specialty led to the clientele at the left. 

Occasionally, however, some of these bond clients would want to get involved in the stock market!

There have been numerous studies and reports  over the years which confirm that the vast majority of  investors...including the "pros" and their managed funds...continually fail to "beat the market". 

Standard & Poor's (S&P) itself tracks and reports  on those funds every 6 months:

 "The SPIVA Scorecard"

"Mutual Funds That Consistently Beat the Market? 

Not One of 2,132"

                                            ...NY Times

"The Stock -Pickers' Market Myth"

                               ...Burton Malkiel

The Danger of Listening to "Experts"

(Jim Cramer goes down in flames!)

***

 Anyway, a better way had to be found to avoid losing good bond clients if there was a bad year in the stock market!

Index funds weren't the answer, because while they would  beat the vast majority of  stock-picking strategies, as indicated above, they would still lose  in a bear market...because they ARE the market!

What was needed was a way to own the S&P 500, but without the downside risk!

This led to a strategy using TREASURY BILLS  AND S&P 500 INDEX OPTIONS which could accomplish the following:

If the S&P 500 increased during the year, the client would capture most or all of that increase.

If the S&P declined, or even crashed, the client would lose little or nothing.

For example, if the client invested $100,000 in the T-Bill/option package...say $90,000 for $100,000 face amount of 1-year  T-Bills** and $10,000 for the options... and the S&P 500 Index increased, say, 15% during  the year, the package would be worth around $115,000 at year end.

If the S&P declined or even crashed, the package would still be worth close to the original $100,000.

The key was that the interest earned on the T-bills would cover the cost of the options, and the T-bills would mature at their face value of $100,000

The investor couldn't lose!

***

But all of that was back in the period of much higher interest rates. Although rates have increased a lot from a low base in the last two years, they are still well below the levels which made things work perfectly back then.

(See the US Treasury Yield Curve)

***

HOWEVER, there are other ways to utilize S&P 500 Index options with very little risk to generate significant returns...

...it just takes a little extra work.

Check it out.

** T-Bills are issued at a discount and mature at par, the difference being the stated interest.

Disclaimer: I am retired and no longer in the investment business. All of the information above is presumed to be accurate, but cannot be guaranteed. Please don't invest using ANY strategy without consulting with your financial, legal and tax advisors.