Why would anyone buy a structured note?

Discussion in 'Strategy Building' started by FreeGoldRush, May 10, 2022.

  1. newwurldmn

    newwurldmn

    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.
     
    #11     May 11, 2022
  2. MrMuppet

    MrMuppet

    are you talking about these Booster NPPNs?

    upload_2022-5-11_12-26-29.png

    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
     
    Last edited: May 11, 2022
    #12     May 11, 2022
    zdreg likes this.
  3. These usually come with a 5-10% sales commission. They are sold, not bought, and suck about as much as you expect.
     
    #13     May 11, 2022
  4. MrMuppet

    MrMuppet

    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
     
    #14     May 11, 2022
  5. Just invest in covered call ETF (QYLD, XYLD, RYLD) paying 10-13 percent. Dollar cost average them and sleep well.
     
    #15     May 11, 2022
  6. 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.
     
    #16     May 27, 2022
  7. ajacobson

    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.
     
    #17     May 27, 2022