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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?

Bob Baerker
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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).

xirt
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