The Motley Fool Discussion Boards
Investing/Strategies / Retirement Investing
|Subject: Re: Retirement, college, and Obamanomics||Date: 1/1/2013 5:53 PM|
|Author: sykesix||Number: 71174 of 78166|
My understanding of the product is as follows:
1. Your princial is guaranteed and the company uses it to invest in high quality/safe bonds.
2. The interest generated by those bonds is used to purchase an "at the money" call option on your chosen index (often the S&P) while simultaneously selling a call option with the same maturity on the same index. This "short" call represents the "cap" on your potential gains and its strike price is typically about 15% higher than the long call.
3. At the end of the year, your long call option will mirror the percent gain in the underlying index and your account will be credited that amount up to the cap - any gains above the cap will be offset by a corresponding loss in the short call position.
4. If the index return for the year is negative, both call options expire worthless and you are left with your original prinicpal.
5. This process will repeat itself year after year - capturing the gains of an underlying index up to a certain cap, but never losing any of your principal. Now what may change is a) amount of