crashy writes bhp calls, page-55

re: crashy writes bhp calls "Crash/stelep, there is only one reason instalment warrants deliver higher returns and that is because of the higher leverage and higher risk."

Im not sure I agree with all of that red. Since the buyer of an instalment warrant pays a fraction of the purchase price, and also receives the dividends, I would argue that they are a 'limited-risk' instrument, in that the most you can lose is the original outlay. Yes leverage is a factor in the return, but 'risk' is certainly lower, not higher. Instalment buyers pay a premium, but a fairly low one by eto time premium standards. By purchasing the 'cheap' long premium of the instalment, and selling 'expensive' short term eto premiums regularly, the result is a net discount.

Think of it like this.....a wrecker goes to a damaged car auction. He buys a banged up magna for $600. This is our instalment. He then strips the car of parts, and sells them over time. This is our monthly call writes. Of course its possible that he buys a lemon now and again, but over the long term he will make a good profit. The same priciples apply in the options market.