How to create this position using SPX options?

Discussion in 'General Discussion' started by maxtodorov, Feb 26, 2018.

  1. maxtodorov

    maxtodorov Well-Known Member

    So a friend shared a Morgan Stanley Prospectus with me. I am attaching for reference.

    Seems the performance of the $ 1000 investment is
    Upside: $1,000 x 113% x SPX percent change up
    SXP goes down less than 30%: $1,000 + ($1,000 x absolute index return) . Where The absolute value of the index percent change. For example, a –5% index percent change will result in a +5% absolute index return.

    SPX goes down more than 30% - you lose what SPX loses.... Screen Shot 2018-02-26 at 12.32.51.png

    At maturity, if the S&P 500® Index, which we refer to as the underlying index, has appreciated in value, investors will receive the stated principal amount of their investment plus leveraged upside performance of the underlying index. If the underlying index has depreciated in value but by no more than 30%, investors will receive the stated principal amount of their investment plus an unleveraged positive return equal to the absolute value of the percentage decline, which will effectively be limited to a positive 30% return. However, if the underlying index has depreciated in value by more than 30%, investors will be negatively exposed to the full amount of the percentage decline in the underlying index and will lose 1% of the stated principal amount for every 1% of decline, without any buffer

    Attached Files:

  2. maxtodorov

    maxtodorov Well-Known Member

    How would one create this position with options futures?
  3. AKJ

    AKJ Well-Known Member

    You cannot. The simplest reason is that there is not exchange market for 5Yr options. The secondary reason is that there is no exchange market for Digital options.

    Fair warning that I make no representations or guarantee that the deconstruction I have attempted below is accurate. It may be wrong. If I've done my deconstruction correctly, this structure is made up of:

    Long 113% NAV of 100% strike 5Yr Call
    Long 100% NAV of 100% strike 5Yr Put
    Short 200% NAV of 70% strike 5Yr Put
    Short 60% NAV of 70% strike 5Yr Digital Put.

    You can closely replicate the digital put with extremely narrow Put spreads.
  4. maxtodorov

    maxtodorov Well-Known Member

    My guess they would be able to simply roll it every year.
    I will try to model this ...
    Thank you!
  5. AKJ

    AKJ Well-Known Member

    closest I could get is something like this:

    All in the 12/20/2020 expiration SPX options

    Long 113 2750 Calls
    Long 100 2750 Puts
    Short 6600 1925 Puts
    Long 6400 1900 Puts

    The setup is effectively vega neutral at current spot, but if the market moves up, you're long vega. Take a look at long term chart of VXX for a lesson on the cost of rolling long vega up the term structure.

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