Risks & Assumptions
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Option prices and the corresponding pay-off are as of expiry & for representative purpose only. Going ahead, as the ETF moves in either direction, final pay-off will change accordingly.
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The assumption of receipt of initial coupon or the initial debit cost is based on the option premiums available at the time of structure creation. This may vary at the time of actual execution depending on the corresponding option prices and implied volatility.
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Numbers given below for the P & L are on gross basis (without considering any transaction charges.)
Rationale
US stock markets CAPE ratio (Cyclically Adjusted Price/ Earnings) ratio now stands at one of the highest levels in the world. As an example, for SPX index, the ratio currently stands near 36.6 levels, 98% higher than its monthly readings since 1981. For Nasdaq Index, the ratio currently stands near 53 levels, again higher than its long term average. While these rich valuations are being supported by surplus liquidity on back of various fiscal & monetary policy measures, markets are also forward looking towards the recovery theme aspect of the US economy.
Going ahead, current rise in COVID – 19 cases across Asian countries & Indian subcontinent will likely keep markets on a jittery edge. The structures provide a convenient way to trade on the future 2 month directions on SPX & Nasdaq 100 Index using options of their respective ETF's. The structures are designed to be market neutral with client having the flexibility to choose from either of these based on his view of the expected market volatility.
Expected View & Return Profile
Yield Earners
With the Yield Earners, there can be potential yields of 6.03% & 10.73% over the duration for the SPY & QQQ structures respectively. This is based on the view that both the indices will be range bound between the levels as mentioned in the table below. However, should the market turn out against the view & instead trend in a volatile manner, losses will start accumulating up to the potential max capped loss of - $43,975.
Volatility Plays
With Volatility Plays, there can be potential max profit $43,975 & $29,450 for SPY & QQQ structures respectively. These gains occur when indices break beyond the levels as mentioned below. The max loss over here is potentially limited to the initial debit cost for entering the structures: -$6,025 & -$8,050 for SPY & QQQ respectively.
