Schroder Salomon Smith Barney is pitching a cap and floor option on the Dow Jones Global Titans Index to investors nervous about the future direction of the equity markets. Daniel McNeill, equity derivatives structurer in London, said in the trade investors buy a three-year exotic option on the performance of an equity index. The option gives investors participation in the first 10% of positive or negative performance for each six-month period of the instrument's life.
At maturity investors cannot lose more than their premium. The investor wins if the index rises 10% or less over each six-month period during the option's three-year life, McNeill explained. The option is cheaper than a plain-vanilla call because adding a cap to the upside more than compensates for having to buy a floor for the downside. The exotic is substantially cheaper than a plain-vanilla index call. He declined to reveal the premium.
McNeill said the Global Titans Index is suitable for anxious investors because it consists of large multinational companies that are likely to see less volatility in their share price. Typical notional sizes for these options are between USD10-USD50 million.
