Almost daily we receive Structured Product offers in our emails from various brokers and banks, such as EFG, UBS, RBC, Commerzbank, Deutsche Bank, and Nomura. As we discussed on our Facebook page, we advise clients when the can achieve the best prices and the highest probabilities of a positive outcome on their investments into structured products by using the CBOE SKEW and VIX measures. Currently, we do not see compelling reason to enter into bullishly oriented structured notes with equity underlyings, but we do see opportunities to hedge our clients’ bullish equity bets in the market.
gold mining structured product noteOne interesting and timely structured product note focuses on the out-of-favor gold-mining sector (mainly represented by the two ETFs GDX and GDXJ). This sector has not participated in the recent equity bull run that has taken place since mid-November of 2012 which now seems a bit overbought in the near term.
Four stocks make up the underlying investments in this note. The 1-year charts below show these stocks are treading water as the market has risen lately.
Possible bottoming pattern if this makes a high low on this pullback
Flat base pattern with oversold momentum and price oscillators
Weak down trend with bullish divergences in the oscillators
Flat base at support from March 2012
Obviously, we expect further declines in these 4 stocks if the market continues to go higher. So why would these be interesting to own in a structured product note?
As we previously mentioned, we view this opportunity as a hedge of our bullish equity posture in today’s market environment. If the equity market does start a pullback, the gold miners could rally. These stocks are are correlated with the movement of gold prices (represented best by the ETF GLD), which is viewed as an anti-inflation and, more generally, a «risk-off» trade.
How this note is structured also makes it an interesting opportunity. Investors will get paid even if these stocks fall! The note pays a coupon as long as none of the 4 stocks fall more than 35% in any quarter. Looking at the charts above, we know that all these stocks would have to trade lower than they did anytime in the last 12 months to put the investors coupon at risk. From a pure statistical perspective this is highly unlikely to occur. Unless these stocks fall to new 52-week lows, investors collect a quarterly income.
Meanwhile, if these stocks all trade at 95% or greater (at the end of any quarter) than where they are priced today, the notes also pay a coupon, Further, the note has an autocall feature meaning the note returns the investor’s principal along with the coupon.
This note is an example of how structured products can make investors money when stocks go up, go sideways, or even go slightly down. With a capital guarantee on this structured product as long as none of the 4 stocks trade below 50% of their current price at the end of four years (on that single date only), investors should feel comfortable that the probabilities of success in this investment are extremely high.
For information on this note, and others that can hedge a bullish equity portfolio, follow us on Facebook or sign up for our structured product mailings.