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This is getting a bit off the topic of the thread, but there's an error in your logic.


"1st buys S&P for 100k and gains 20% - profit 20k"


That's not what a CAPS outperform call is. More importantly, what if over this period of time the S&P went up by more than 20%? You include the difference between the benchmark and the stock in question when you make your underperform example, but not here in your outperform example. I think that's a mistake.


In a nutshell, CAPS is tracking whether or not your call was correct, and by how much, relative to the market. It was never intended to be a portfolio simulation game. You are right that there's no such thing as an 'underperform' call per se (though it can be mimiced) - but what you miss is that there's no such thing as an 'outperform' call either. One is either long or short, not outperform or underperform. The same issue exists with both outperform calls and underperform calls - why people only take issue with it on the underperfome side is beyond me.


That said, if one insists on finding a mechanism in the real market that duplicates the score seen in CAPS, they do exist.


An underperform call is the same thing as shorting the company in question, and investing the proceeds from the short sale in the S&P.


An outperform call is the same thing as shorting the S&P, and investing the proceeds from the short sale in the individual stock in question. (Note this is quite different from the way you presented it)


Margin interest and transactions costs ignored in both examples above.






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