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Strategies & Market Trends : Synthetic Derivatives

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To: CapitalistHogg™ who wrote (437)	9/14/2006 10:33:18 AM
From: TimF	Read Replies (1) of 464

Buy at-the-money S&P 500 put options annualized at 4% (current price). Place your money in short-term Treasuries at 5%, and use the 5% proceeds to pay for your 4% options. Buying put options doesn't give you money that you can place in to treasuries. Buying options costs money. Maybe I'm just nitpicking about the wording. You could place an additional equal sum of money in treasuries. But the put options could go to zero while the treasuries also go down. Of course the treasuries are short term and you could hold to maturity. Than you walk away with 4.72% (not 5% according to the quote I just checked) on the treasuries and -100% on the puts. I suppose the plan is to spend 4% of the amount you spend on the treasuries (so that -100%, is equivalent to only a 4% loss of the amount you have in the treasuries), and you bank the .72% difference (1% at the time when this is written, maybe less than .72% now if the IV of the put options has changed), but .72% isn't exactly a high rate of return for a year even if it is risk free. Tim

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