"Synthetic Bonds"
OK, you see where interest rates are right now. How on earth can we earn an annual yield of 8% or more...and do it safely?
Not as hard as you might think.
There are several ETFs out there which hold all of the stocks in the S&P 500. A few of them then do something to generate dividends...usually monthly...which equate to 8% - 12% annually.
They accomplish this by selling call options against the S&P 500 every month to generate income, which is then paid out to the ETF investors each month as dividends. (These dividends have a big tax advantage, by the way, and may end up being tax free!)
Depending on the strike prices of the options which are sold, this process effectively limits or "caps" the upside potential of the ETF price. If the S&P 500 goes up, say, 20% in a year, the ETF itself might only appreciate 12%.
On the other hand, if the S&P 500 should decline...or even crash...the market price of the ETF could fall just as much.
So...while the ETF pays out nice dividends, it's market price has limited upside potential and very definite downside risk. The dividends might cushion things a bit in a crash, but the ETF market price could still get hit hard.
So the challenge is...how do we create something that will allow us to collect those nice 8% to 12% dividends without having to worry about the market risk?
You do it like this: Using S&P 500 Index options, the investor creates a "collar" around the ETF which will effectively offset most of any price appreciation the ETF might earn...in exchange for protection against against any likely decline which may occur. The cost of this hedging technique will be negligible.
The result will be an ETF/collar package that keeps generating those great monthly dividends...while experiencing little or no volatility!
A "SYNTHETIC BOND" if you will!
The investor can then decide if he wants to just keep the "bond" strictly for a safe source of income...or use it to replace the T-bills in the old T-bill/option strategy of decades ago...outlined on the previous page...which allowed investors to own the S&P 500 without downside risk!
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If you are comfortable working with options, the mechanics of creating the "synthetic bond" can be easily explained. If you're not, any competent financial advisor or broker who deals with options should be able to do it for you.
Details: cyberterrys@hotmail.com