[furiouslol]

An almost risk-free way to money in the stock market is to put most of your money in fixed income while apportioning a small % in long dated options.

Eg. you think Morgan Stanley is dirt cheap at current levels ($10) and you are willing to invest $100,000 in them.

Action 1: You bought $100,000 worth of MS shares at $10 each

Action 2: You bought $90,000 in bonds that yields 11%. You bought $10,000 worth of Jan 2010 MS 5 call options at $7 each.

Scenario 1: MS gets nationalized or goes bankrupt Action 1: You would have lost almost all of your $100,000 investment. Action 2: If you hold out until your bond mature, you'll get back your $100,000 principal after 1 year. Your options is worthless.

Scenario 2: MS goes up to $30 Action 1: Your investment is now worth $300,000 Action 2: You get $100,000 from your bonds and your $7 options is now worth $18. So your investment is worth $125,000.

So Action 1 is very volatile and risky. Your profit range from -100% to 200%.

Action 2 allows you to sleep soundly at night, even during current market conditions. Your profit range from 0% to 25%. Hey not bad at all. In the worst case, you'll have at least preserved your capital.

[swombat]

Scenario 3: The bond issuer defaults because of the sub-prime crisis, and MS is nationalised.

Woopsie daisies.

[furiouslol]

Haha. Yeah. That's why i inserted the word 'almost' before 'risk-free'

[netcan]

Assuming both scenarios are equally likely:

   Option 1 Average ROI = 50%
   Option 1 Average ROI = 12.5%

High risk premium. A good time to take risks?.. if you can afford it.

[furiouslol]

Not for MS.

The probability of MS getting nationalized or going bankrupt is 90%. So it's 0.9 * 0 + 0.1 * 3 = 0.3 = -70%.

Whoops.

[netcan]

Probably not 0 is it?