Deutsche plans capped BUyS linked to financials; structure cuts protection for better upside, advisor says

By Kenneth Lim

Boston, Sept. 3 - Deutsche Bank AG's planned offering of capped buffered underlying securities linked to the Financial Select Sector SPDR fund is a bullish product that offers a good participation rate in exchange for skimpy protection on the downside, an investment advisor said.

Deutsche Bank plans to price zero-coupon capped buffered underlying securities (BUyS) due April 5, 2010 linked to the Financial Select Sector SPDR fund.

At maturity, if the underlying fund ends at or above its initial level, investors will receive par per $1,000 note plus 1.5 times any gain in the fund, subject to a total return cap of 36.75% to 40.5%. The exact cap will be set at pricing.

If the fund declines by up to 10% at maturity, investors will receive par. Investors will lose 1% for every 1% that the fund falls beyond the 10% buffer.

Product fits bullish view

The Deutsche product is suitable for investors who are bullish about the underlying sector, an investment advisor said.

"It's clearly a bullish product because you stand to make a lot of money if the SPDR goes up but you don't get a lot of protection if it goes down," the advisor said.

The downside protection in the notes is not much, but the structure makes up for it by being generous on the upside, the advisor said.

"Given the current volatility in the financial sector, a 10% buffer isn't a lot," the advisor said. "But you could get up to about 38.5%, if you take the midpoint, if the strategy works out. That's 38.5% over 1.5 years, which is about 24.25% annualized. That's a very good return. And these are leveraged, so you stand a good chance of outperforming the underlying as long as it doesn't exceed the cap, which, again, it quite high."

Protection may be sufficient

The advisor said that the thin buffer may be good enough for investors who are confident about their view of the underlying.

"If you're sure that the SPDR is going to go up over the next 1.5 years, then why wouldn't you want to get as much as possible on the upside with the bare minimum in terms of protection?" the advisor said. "It's like buying auto insurance. If you know that you're a safe driver and you're not going to use the car a lot, why not choose something with more deductibles so that you pay less every year?"

"Of course, that kind of confidence and knowledge is a result of good research and understanding of the underlying," the advisor said. "I think the lesson here is that it pays to do your research. If you've done your research, you'll be more able to buy products like these when they fit your view."

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