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I read a thread on another site about some six year index annuities called Structured Investment Options (SIO). They offer a variety of combinations of an upside cap with limited downside protection (DP) on various indexes like the Russell 2000, MSCI EAFE and S&P 500. The DP can be 10, 15 or 25% and the cap depends on the amount of DP that you choose (the higher the protection, the lower the cap). Here's one of the companies offering these:

https://us.axa.com/annuities/structured-capital-strategies/app/howSIOWorks.html

If you choose the annual segment on the Russell 2000 (IWM) with 10% DP, the cap is 10%. That means that you are protected from the first 10% of drop. If the index rises more than 10% in the year, you only get 10%. If it rises but rises less than 10%, you get that amount of gain. At the end of the year, everything resets.

For example, invest 100k. The profit cap is 110k and you lose nothing between $90k and $100k. You bear all of the loss below $90k. So if IWM rises 15% in year one, you net 10% and the position is worth $110k. If it rises 2% then the position is worth $102k. If it drops 13% then you only lose 3% and you are worth $97k.

Whatever the above ending value for year one is becomes the new starting value for year two. If IWM rises more than 10% in year one, for year two, your new cost basis is $110k and the new DP and cap levels are $99k and $121k. This continues for a total of 6 years

This can be reasonably duplicated synthetically by buying the index, selling a covered call 10% OTM combined with a bearish vertical spread 10% wide. The advantage with the synthetic would be that you can select your time frame (less than a year if so inclined), you have control of your money and can exit any time you want. You don't get tied up for 6 years.

Does anyone have any experience with these products or insight into the synthetic duplication of them?

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  • As is, it's a bit of a "yes" or "no" question. Could you specify what you would like to know?
    – 0xFEE1DEAD
    Feb 4, 2018 at 14:17
  • If I knew what I wanted to know, I wouldn't be asking if there were any peeps here who have experience with these financial products or their synthetic duplication. So is it a "yes" or a "no" for you?
    – Bob Baerker
    Feb 4, 2018 at 14:25
  • As a follow up, two plus years ago I began implementing this strategy on individual stocks and a couple of ETFs. I have found that I could get 8-10% of cap and 20% of downside protection (annualized). With the high implied volatility this year, in some instances I have gotten as much as 25% of downside protection.
    – Bob Baerker
    Oct 9, 2020 at 17:43

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While I don't have a lot of experience with these type of Structured Products, I have heard that they are very profitable (particularly for the brokers pitching them) so you may find you can duplicate them synthetically with more control and for less money.

However, there are the risks that you make mistakes doing them yourself, or there are things you haven't thought of. The immediate concerns would be that there is sufficient liquidity in the options market to do the trade you want, slippage as you execute the various legs, and the options may not go out that far (e.g. only to one or two years, rather than 6).

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  • I've put a lot of time into analyzing these and I have established some. These Structured Products are merely options combos and the synthetics offer much more downside protection and profit potential, hence the large profitability for the insurance company. Synthetics can be put them on for shorter periods of time, bumping up the potential ROI. There is no shortage of liquidity in the SPY and the B/A spreads are narrow, compared to many other ETFs. You don't want to go out 2 or 6 years. That's the advantage of the synthetic.
    – Bob Baerker
    Mar 25, 2018 at 11:26
  • Here's a post that offers some of my thoughts that have evolved since this post: money.stackexchange.com/questions/92072/…
    – Bob Baerker
    Mar 25, 2018 at 11:26
  • As follow up, I have implemented a number of these synthetics on equities and ETFs over the past year. The slippage can be minimized by utilizing a long stock/ETF collar and legging into the short put 20% OTM (the synthetic at 20% downside protection provides a reasonably similar P&L as the 10% insurance company product (the difference is the insurance company's excessive profit, plus they keep the dividends!). Since it's 20% OTM, the premium is low and non volatile so low slippage. With IWM, SPY, etc., there's no liquidity issue.
    – Bob Baerker
    Mar 9, 2019 at 15:21
  • As for options that go out 6 years, that's not applicable here. The insurance company's product is for 6 years but it resets every year so they are using one year LEAPs for the construction of the Structured Product.
    – Bob Baerker
    Mar 9, 2019 at 15:22

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