Capital protected ETF
- Thread starter traderjo
- Start date
for etfs yes.
for 2-2.5 year fixed maturity notes, it is very safe with a higher return. don’t even need to roll the option.
Calamos is 365 days with 9-10% cap and 100% downside / 0.69% fees,
what I am trying to find out is
1) Rate at which it changes with SPY during the 365 days, asked them they have no idea they only shows each days % change in SPY and the ETF
2) Can the same be achieved at retail ? European style options needed
what I am trying to find out is
1) Rate at which it changes with SPY during the 365 days, asked them they have no idea they only shows each days % change in SPY and the ETF
2) Can the same be achieved at retail ? European style options needed
It is exceedingly difficult to predict the rate of change. If you want the performance that is advertised, you have to hold until maturity. If you need to get out early, you will not get the upside of SPY, and you won't have the downside protection, either. If you exit early, you may take a loss on principal.
You can buy SPY and hedge it with $XSP options, i.e., a collar, buy a put and sell a call. I have done this.
- $XSP are cash settled index options with European expiration.
- You won't get 100% downside protection for zero cost. But you can get close. If you want 100% downside protection, you have to buy an ATM put, and it will cost more than any OTM call that you sell. You can get close to zero cost if you can tolerate a 2% or 3% loss, i.e., you buy a put that is a little bit OTM, and you can sell an OTM call for the same price. You may or may not be happy with upside cap. But this strategy works, and a retail account can do it if you have enough money to buy 100 shares of SPY.
- Most brokers will treat the short call as a naked short call, even though the CBOE says it can be treated as a covered call. $XSP does not correlate exactly with SPY. If you are taking a very large position, e.g., 10,000 shares of SPY, you might need to sell less than 100 calls in order to have the proper ratio. If you are only doing a couple hundred shares of SPY, then the difference between $XSP and SPY is negligible.
- During the 365 period , I am aware that it certainly won't give the upside at delta 1 with SPY as you can see in the current relations it lags,, what I am more concerned is with a sudden drop in SPY will that be reflected at same rate? since it has not happened since May 2024 it is hard to know yet 9 Only he IWM based ETF showing some small loss
- Doing it at retail, I am aware of how collar works but the thing is How the ETF gets 100% protection with 9-10% Upside? that is the key , at retail as you pointed out it can't be zero cost / + the issue of lack of cross margin between XSP and SPY
- Doing it at retail, I am aware of how collar works but the thing is How the ETF gets 100% protection with 9-10% Upside? that is the key , at retail as you pointed out it can't be zero cost / + the issue of lack of cross margin between XSP and SPY
I don't have a real answer to your question, but from the prospectus it is pretty clear that they are using a collar. But they are using FLEX options, which allows them to negotiate terms directly with the counterparty.
Here's what the prospectus says:
To provide the Capital Protected Target Outcome, the Fund purchases and sells a series of put and call FLEX Options on or around the last business day of the month prior to the beginning of an Outcome Period. As the purchaser of these FLEX Options, the Fund is obligated to pay a premium to the seller of those FLEX Options. The Adviser will calculate the amount of premiums that the Fund will owe on the put options acquired to provide the Capital Protection and will then sell call FLEX Options with terms that entitle the Fund to receive premiums such that the net amount of premiums paid per unit of the Underlying ETF is approximately equal to the price per unit of shares of the Underlying ETF.
Throughout the prospectus, they stress that they cannot guarantee the outcome. They cannot guarantee the cap, and they cannot guarantee the 100% downside protection.
Funds offering 100% downside protection are fairly new. But other buffered funds, with various levels of downside protection and upside caps, have been around for several years. It would be interesting to look at some of them and see if, in the final outcome, they have ever fallen short of the upside target, or lost more than the advertised downside protection.
With that being said, they appear to be claiming that they can somehow sell the right number of calls, at the right price, to fully pay for the puts that provide 100% downside protection.
The counterparty to the puts is probably not the same person as the counterparty to the calls.
I suspect that this asymmetry is what makes it possible, together with the customizable features of FLEX options.
When you have three parties involved--the fund, the buyer of the calls, and the writer of the puts--it's not a zero sum game.
Even with a retail collar, there could well be different counterparties to the put and the call, and it is possible for all three parties to make money.
Yes, it is with Flex options
If you say "and they cannot guarantee the 100% downside protection." then why would anybody purchase these ETFs? I though what they meant is the cap and downside is ONLY guaranteed on expiry day
By the way
it will be interesting to see how other buffered funds worked in the past and how this one does, so far it is tracking sort of 1/2 or 1/3rd the movement
If you say "and they cannot guarantee the 100% downside protection." then why would anybody purchase these ETFs? I though what they meant is the cap and downside is ONLY guaranteed on expiry day
By the way
it will be interesting to see how other buffered funds worked in the past and how this one does, so far it is tracking sort of 1/2 or 1/3rd the movement
Here's what the prospectus says:
While the Fund seeks to provide 100% protection against losses experienced by the Underlying ETF (before fees and expenses) for shareholders who hold Fund Shares for an entire Outcome Period, there is no guarantee it will successfully do so.
There is no guarantee the capital protection and cap will be successful and a shareholder investing at the beginning of an Outcome Period could also lose their entire investment.
There is no guarantee that the Fund will be successful in providing these investment outcomes for any Outcome Period, and an investor may experience returns on the Fund significantly below the Cap.
In periods of extreme market volatility or during market disruption events, the Fund’s ability to offset investor losses through the use of the FLEX Options to achieve the stated Capital Protection, or provide a return up to the stated upside Cap may be impaired, resulting in an upside limit significantly below the Cap and downside protection significantly lower than full capital protection (i.e., losses greater than 0%), because the Fund may not be able to trade or exercise existing FLEX Options, or may not receive timely payment from its counterparties. An investor may lose their entire investment and an investment in the Fund is only appropriate for investors willing to bear those losses.
I think it is unlikely that these funds will experience a significant loss, or a major deviation in the expected upside. But I suppose that depends on how you define significant.
If you reasonably expect 100% downside protection, and you end up with a loss of, I dunno, say, one fourth of one percent, because the index lost 4.3% over the applicable time period, and their option strategy didn't work exactly they way their model predicted it would...
Well, if I invested $50K in this thing instead of buying 100 shares of SPY, then I have lost $125.00 (instead of losing $2,150.00) and I'm probably not going to freak out.
But if I am managing an institutional account for a charity or something, and I put one third of the money in this thing, assuming that it is impossible to lose any principal, and it suffers a loss of one fourth of one percent... well, that might generate some uncomfortable conversations with the board of trustees.
