What if... Zero Carrying Cost

WHAT IF......ZERO CARRYING COST Treasuries S&P 500 Price Carrying Cost 2.4% Long 150 Call P/L 150 153.60 What if the client wanted....... Zero Carrying Cost CARRY COST OF ABOUT 2.4% OVER ABOUT 1% A YEAR. THE QUESTION CAN WE PAY NO CARRY COST? UPISDE AND PAY NOTHING ON THE DOWNSIDE? CRASHES, WE'RE FLUSH, WE DON'T LOSE ANY MONEY. THE ANSWER IS IT'S REAL SIMPLE OF THAT COST. Carrying Cost Carrying cost is the different of what was invested and what the value of the treasury at Maturity $3,000,000 - $2,925,791 = -$74,209 Carrying cost $74,209 represents 2.47% cumulative - 98 basis point annualized (average per year TO DO IS BUY LESS CALLS. IF EACH CALL $2020 AND I HAVE $74,000 OF OVERAGE, I WOULD BUY LESS CALLS. TOTAL DOLLARS INVESTED IN DERIVATIVES 200 Dec 2009 Calls ATM with a strike At the Money - (no tracking error) - Time Value $20.20 per contract 200 contract X $20.20 X 100 (contract multiplier) $404,000 invested in SPY controls $3,000,000 IN THIS PARTICULAR CASE, 36-37 LESS CALLS, 163 CALL CONTRACT @ $2,020 = $329,260 WHAT IF......ZERO CARRYING COST Treasuries S&P 500 Price Carrying Cost Zero Long 150 Call P/L 150 81% Participation UPISDE I WOULD HAVE NO DOWNSIDE AT ALL, I WOULD CAPTURE 81% OF THE UPSIDE. WELL, WAIT A UPSIDE. YEAH, I'M CUTTING OFF MY DOWNSIDE, CUT OFF HERE'S WHAT I'M FORGETTING. Popular Mix 40% Bonds 60% Stocks Mix CAPM Statistics Standard Up-Market Down-Market Other Statistics 40/60 Alpha (Jensen's) 0.0078 0.5247 -0.1401 Annualized Ret. 22.54% Beta 0.4010 0.4401 0.4351 11 Month Ret. -20.54% CAPM R2 0.8902 0.7571 0.8289 Std. Dev. 0.1336 Correlation 0.9435 0.8670 0.9085 Upper SemiDev 0.1296 Tracking Error 0.1037 0.1151 Lower SemiDev 0.1390 40/60: 0.704 SPX: 1.281 2009 What are you giving up? A 60/40 MIX, IT ONLY GIVES YOU 44% UPSIDE ON THE UPSIDE. MARKET UP 10% DOWN 10% YOU'RE DOWN 5% YOU'RE DOWN 5% 2008 Downside 50% Downside THE STRATEGY I JUST EXPLAINED, MARKETS UP 10% THE MARKETS DOWN YOU'RE ZERO. 20% Bonds 80% Stocks Mix CAPM Statistics Standard Up-Market Down-Market Other Statistics 20/80 Alpha (Jensen's) 0.0029 0.0185 -0.0459 Annualized Ret. 22.08% Beta 0.7911 0.7401 0.7307 11 Month Ret. -30.76% CAPM R2 0.9475 0.9488 0.9085 Std. Dev. 0.3563 Correlation 0.9673 0.9748 0.9517 Upper SemiDev 0.3075 Tracking Error 0.1290 0.1115 0.1028 Lower SemiDev 0.3211 20/80: 0.794 SPX: 1.281 2009 What are you giving up? MARKETS UP 10% YOU'RE UP 7% MARKETS DOWN, YOU'RE DOWN 7.4% I'M DOWN HERE'S WHAT'S INTERESTING. IPS Fully Protected vs Market Products 2000-2023 Asset Class Return Risk Total Value IPS Fully Protected 9.25% 0% $835,418 Annuity 3.16% 0% $211,133 Diversified (60%/40%) 6.23% -16.7% $426,708 S&P Composite 7.03% -37.06% $510,129 Nasdaq 7.29% -73.4% $541,014 Annuities are only insured up to $200,000. AT ONLY GETTING 74% OF THE UPSIDE OVER A 20 YEAR PERIOD, I'M UP 7.5% I'M FLAT. I WOULD HAVE THAT AT 9.25% ANNUALIZED WHERE'S THE S&P LONG THE MARKET AT 100% OF THE UPSIDE, I'D ONLY GET 7.03% BECAUSE I'D ALSO CAPTURE 100% OF THE DOWNSIDE. THE 60/40 NOT EVEN IS GOOD ANNUITIES FORGET ABOUT IT. AGGRESSIVE NASDAQ WOULD HAVE DONE WORSE. WELL DONE A LITTLE BIT BETTER OVER A LONG TERM, OF COURSE, BUT A LOT HIGHER. IN THIS STRATEGY. THE NUMBERS THE NUMBERS DON'T LIE. THE NUMBERS SPEAK FOR THEMSELVES. HOPЕFULLY THIS WAS HELPFUL IN BETTER WAY THANK YOU FOR LISTENING.