I have an investment account where I'm currently holding about $200K in SPY shares (S&P 500 index). I'm a bit worried that we are in a bubble, so I'm looking into strategies to hedge my downside. Before I change my strategy, I just want to make sure I really understand how things work.
So I'm looking at options on SPX, which follows the S&P 500 and is settled in cash. For a downside hedge, I know that I can buy a PUT and keep my long shares, or I could just sell my shares and invest in a deep in the money CALL option.
Currently SPX is at 2055.74 and I can buy a MAR16 1500 CALL for $554.80. My problem is that this seems too good to be true. Isn't the intrinsic value of that option $555.74? It seems that if I buy it and the market stays completely flat, I make $94 for free.
Compared to the long stock position, the CALL option will make the same profit, but it caps the downside losses at %27. Plus, I only need to spend $50k on the option, I can put my other $150k into a money market account.
So what is the downside of the CALL option strategy compared to being long in the stocks? And why would the option trade for less than intrinsic value? Am I missing something?
P.S. I know the bid ask spread is large ($4), but does that matter if I'm sure I'd hold the option to expiration (in a year)?