There's no such thing as a risk free high return strategy, except for arbitrage of course but that's different. Without risk there's no return beyond risk-free rate!
Don't you think that calls in your structure would loose time value too? The main difference between your structure and mine is that you can (a) choose a mildly risky capital vehicle (i.e. A+ bond instead of govies). This will allow you to take a position that would either compensate you a little bit for inflation or allow to purchase more options, potentially on both sides, thus giving exposure to vol as well as growth. (b) select OTM strikes for calls that in your opinion might produce the best leverage. This one is a bit tricky, as you will encounter various opinions on relative richness/cheapness of wings vs ATMFS. I do agree that long-vol in equities as of today is a good bet and have a bit of that in my private account. I would also say that while gamma is cheap, vega is even a better deal (that's beside the point, though).
There is risk in this structure - by purchasing options he is foregoing risk-free interest on the capital and in the worst case will see NO return on his capital (100% in, 100% out).
Exactly! And by the way instead of 3.5% risk free bond rate I can use for example mutual fund or closed-end fund (like FRB) with floating rate bank loans - it is about 7% yield. So it will double options amount and help me to acquire about 150-200% of index value return. It seems to me outperforming an index 1.5 times VS long stock is a good deal
The point is that equivalent strategies are using 3.5 risk-free rate but we are using more aggressive rates (up to 7-8%) with moderate decrease in debt rating. Also with decreasing strategy timeframe we'll have nice increment in total return value because of excluding negative periods. For example C (Citigroup) price return for last 5 years was negative: about -5.75% per annum with 7% standard deviation. If our timeframe'd be 1 month and we'll exclude negative periods (our return during these periods is 0) with this strategy - total return would be about 34.85% per annum with 4% standard deviation! Tell me more about this interesting strategy please