Visual Quantitative Finance: A New Look at Option Pricing, Risk Management, and Structured Securities

15. Covered Synthetic Annuities

A covered synthetic annuity (CSynA) is a synthetic annuity that uses only covered call options and protective put options. A CSynA is a more conservative investment than its underlying security because covered calls and protective puts work to make the potential losses from a CSynA less than those of the underlying security.

To illustrate how a CSynA functions, the chapter begins by comparing a CSynA to a covered call strategy and addressing the main objections to using covered calls. Then, a CSynA is constructed using Deere & Company stock as the underlying security. The CSynA transforms the Deere stock position into a related security that is less volatile and produces higher levels of current income. Of course, ...