Why would anyone buy a structured note?

[newwurldmn]

could you shed a bit more light onto these? I never did structured products outside the EU and only traded those that I could find a replication by myself (e.g. options and NDFs). For me the biggest problem always was that the bank would cancel the trade once they figured they had mispriced the product.

It's actually prohibited to do so but you know...they have 200 lawyers and I have one. So I looked somewhere else.

Europe is different I think. In the US it’s only issued to private clients.

I was trading a lot of boosters. Basically 1x2 cost less callspreads with stock. The notes would have a downside buffer - which I couldn’t replicate myself. Basically for 5 years I was earning the SPX with 1/2 the capital and even less than that in risk until 2008, when the last note I traded busted. After that the levels weren’t very good.

 

[MrMuppet]

Europe is different I think. In the US it’s only issued to private clients.

I was trading a lot of boosters. Basically 1x2 cost less callspreads with stock. The notes would have a downside buffer - which I couldn’t replicate myself. Basically for 5 years I was earning the SPX with 1/2 the capital and even less than that in risk until 2008, when the last note I traded busted. After that the levels weren’t very good.

are you talking about these Booster NPPNs?

I find it interesting that these were offered with downside protection. I mean, these are really easy to replicate if you add a put on it. But I wonder how they were able to offer downside protection, because that would mean short gamma for them...which in turn means they have to offload that for a premium to another idiot aka. offer mispriced downside protection.

EDIT: I mean, the picture is misleading for sure. If you sell stock you basically have a free butterfly

 

[MoreLeverage]

There does not appear to be a mathematically correct reason to hold these.

These usually come with a 5-10% sales commission. They are sold, not bought, and suck about as much as you expect.

 

[MrMuppet]

These usually come with a 5-10% sales commission. They are sold, not bought, and suck about as much as you expect.

yeah, but the sales commission goes to sales, not the book. So if you are offering these as a book runner, you cannot count on the commission to cover your risk.

Your profit comes from selling above par

 

[TimtheEnchanter]

Just invest in covered call ETF (QYLD, XYLD, RYLD) paying 10-13 percent. Dollar cost average them and sleep well.

 

[Stratos Capital]

Structured notes can offer "interest" of 30% or more. There are thousands of them, they are frequently callable and downside protection often goes away if some underlying asset falls more than X% by some date. They are basically side bets that are tied to an asset. If a bank like JP Morgan is selling a structured note they have math PhDs that have calculated the odds are in the banks favor. There is no value creation here, only a value transfer. It's like placing a complex bet at a race track.

Since the odds are never in your favor why would someone buy a structured note instead of just holding cash? Do people just like to speculate with them? There does not appear to be a mathematically correct reason to hold these.

I am a professional portfolio manager for a family office and we would buy structured notes regularly.
The main reason for using them is to construct well-defined pay-offs (especially more complicated ones) without having to get into the buying & selling of options and re-investing option premiums into bonds or other short-term instruments yourself.

You can generally achieve the same pay-off using options and futures, but you would have to consider derivative mis-pricings, buy several options across different expiries and strike prices. A real chore with execution risks.

So in short, structured notes provide a convenience to investors that can't structure their desired pay-offs efficiently, at a tiny cost. But they do not give any real edge to the investor. No free meal.

 

[ajacobson]

"So in short, structured notes provide a convenience to investors that can't structure their desired pay-offs efficiently, at a tiny cost. But they do not give any real edge to the investor. No free meal."

Unless you are buying in the secondary market and you are will to size - the bank will build the hedge in. It'll cost, but it generally can be done. Singapore is pretty much the world center for this activity.