2008 market by nature are uncertain. I saw current news headlines make them appear even more uncertain. In these uncertain times, there are heads-I-win-tails-you-lose opportunities available. An alternative to above issue is available in the markets, where the downside is completely eliminated and the full (and sometimes more than the full) upside is captured.
So where is the catch? There is no catch other than taxes. If the markets were to go up, long-term capital gains in equity would be tax free, where as long-term gains in equity options may not be. Further bank interest would be subject to taxation. A question may arise as to why these opportunities are available in the market. The reason is that market participants have very short memories and tend to extrapolate recent events far into the future. Just as demand for earthquake insurance goes up immediately after an earthquake, currently there is huge demand for put options (implied volatility of 40%-50% for the academically inclined). In such a scenario, call options are being sold at ridiculously low levels (implied volatility of 0% !!!), right?
Therefore for someone who is not bothered about paying taxes on the gains, this 2-cents tip would be heads I win, tails you lose.
Next question: Wanna bet?
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