Secret 38THE SECOND SECRET TO PORTFOLIO INSURANCE
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Another way to buy stock and get insurance with it is to buy
a structured product. There are financial instruments that trade
like closed end funds where you are actually buying an index of
stocks (i.e. S&P 500) (i.e. index mutual fund).
These instruments trade like a listed stock and can be
bought and sold during the day. When you buy them, it is like
buying a mutual fund (closed end), but they have a built-in insurance.
They guarantee you a certain price when they mature,
usually in five to six years, but you can trade them up to the day
they mature.
Each of these instruments or structured products has different
terms and a guarantee by one of the big brokerage houses.
These structured products have strike prices like options and will
rise at a similar rate to the underlying stock index. However,
there is a cost for this insurance, usually reflected in a slightly
smaller gain.
In the mid 90’s, I bought shares of one of these instruments.
It was the Stock Index Return Security (SIS), a structured product,
that reflected the Mid Cap 400 Index. I paid $8.75 for each
share and was guaranteed 10 at maturity. I sold my position several
years later for about $32 a share.
Let’s take a look at an example. Merrill Lynch has a structured
product whose symbol is MLF that tracks the S&P 500
Index. Referred to as an S&P 500 “MITTS”, the MLF are senior
unsecured debt securities of Merrill Lynch. It has a strike price
for the S&P 500 Index of 1011, but at expiration on 7-1-05 only
gains in S&P 500 above 1119.49 would be reflected in the MLF
price.
The difference reflects the cost of downside protection. The
market price of the MLF was 9.94 on 4-24-02 when the S&P 500
Index was 1094, but the guaranteed price at expiration is 10 regardless
of what the market does, even if the S&P 500 Index were
to lose 50% or more of its value.
In other words, here is the way, in a sense, to buy a stock
mutual fund without any downside risk due to a fall in the value
of the index.
The MLF is traded on the American Stock Exchange along
with most structured products. Before buying one of these securities, make sure to read the prospectus. For such information
call 1-800-THE AMEX, or check their web site, amex.com.
As good as all this sounds, particularly when your concern is
for insurance, you still have to be alert. Before purchasing shares
in one of these structured instruments, do your homework. Always
do your homework!
Another way to buy stock and get insurance with it is to buy
a structured product. There are financial instruments that trade
like closed end funds where you are actually buying an index of
stocks (i.e. S&P 500) (i.e. index mutual fund).
These instruments trade like a listed stock and can be
bought and sold during the day. When you buy them, it is like
buying a mutual fund (closed end), but they have a built-in insurance.
They guarantee you a certain price when they mature,
usually in five to six years, but you can trade them up to the day
they mature.
Each of these instruments or structured products has different
terms and a guarantee by one of the big brokerage houses.
These structured products have strike prices like options and will
rise at a similar rate to the underlying stock index. However,
there is a cost for this insurance, usually reflected in a slightly
smaller gain.
In the mid 90’s, I bought shares of one of these instruments.
It was the Stock Index Return Security (SIS), a structured product,
that reflected the Mid Cap 400 Index. I paid $8.75 for each
share and was guaranteed 10 at maturity. I sold my position several
years later for about $32 a share.
Let’s take a look at an example. Merrill Lynch has a structured
product whose symbol is MLF that tracks the S&P 500
Index. Referred to as an S&P 500 “MITTS”, the MLF are senior
unsecured debt securities of Merrill Lynch. It has a strike price
for the S&P 500 Index of 1011, but at expiration on 7-1-05 only
gains in S&P 500 above 1119.49 would be reflected in the MLF
price.
The difference reflects the cost of downside protection. The
market price of the MLF was 9.94 on 4-24-02 when the S&P 500
Index was 1094, but the guaranteed price at expiration is 10 regardless
of what the market does, even if the S&P 500 Index were
to lose 50% or more of its value.
In other words, here is the way, in a sense, to buy a stock
mutual fund without any downside risk due to a fall in the value
of the index.
The MLF is traded on the American Stock Exchange along
with most structured products. Before buying one of these securities, make sure to read the prospectus. For such information
call 1-800-THE AMEX, or check their web site, amex.com.
As good as all this sounds, particularly when your concern is
for insurance, you still have to be alert. Before purchasing shares
in one of these structured instruments, do your homework. Always
do your homework!