Derivatives (Part 3/ Factor and Knockout Certificates)
For the other parts or the whole Derivatives Guide please read the attached post on my profile.
5) Factor Certificates
Differences to other derivatives
Factor warrants offer the possibility to participate in price movements within one day or to accompany whole trend developments with a leverage.
Price rises can be anticipated with the help of a long- strategy and from price declines with the help of a short- strategy can be used to profit from price rises.
The term of this special type of warrant is not limited, so the warrant must be sold in order to realize economic value.
In addition, the issuer is generally entitled to terminate a factor warrant.
Valuation
The factor warrant indicates via the "factor value" the leverage with which the warrant reflects the daily price change.
Means: price moves 5%; factor *2 warrant moves 10%.
In addition there are financing costs. For many issuers, these consist of
- Costs for raising capital
- Possibly fees
- An IC (individual cost rate)
Means: If I go long with a factor of 5, but the price does not change at all, the bill loses value over time due to the costs.
Special features
Daily chaining
The value is calculated by the daily change, the basis is always the closing price of the previous day. With each closing price of the underlying, a new reference price is thus determined, which in turn forms the basis for the percentage performance of the following day.
This daily adjustment of the capital value takes place automatically and is referred to as chaining.
Path dependency
Concluding from the daily chaining: not the price of the reference value, but the daily developments of the value are relevant.
Example:
(factor bill without financing costs for simplification).
Basic value Day1 Day2
Basic rate 100€ -20% ---> 80€ +25% ---> 100€
Factor *2 Opt. 100€ -40% ---> 60€ +50% ---> 90€
Although the base rate is back to the same price value, the *2 factor has lost value.
The daily chaining can be useful to the investor in case of positive developments, but it can be equally harmful to him if the bill does not perform as thought.
[ https://www.sg-zertifikate.de/faktor-optionsscheine-ehemals-faktor-zertifikate ]
6) Knock-out products
(Turbos= Turbo warrants)
Differences to other derivatives
Also called knock-out certificates, mini futures and turbo warrants.
As with factor warrants, a Long and a Short strategy can be applied.
Unlike classic warrants, turbo warrants have a knock-out barrier. If it is touched by the underlying, a knock-out event occurs and the product matures prematurely.
With a turbo warrant, you can again benefit from the leverage effect and thus theoretically multiply your profits. (Share rises by 5%, the long knockout product with 5 leverage rises by 25%).
However, if the share develops to the investor's disadvantage and touches the strike price contrary to expectations, the capital invested by the investor is used up.
In this case, the so-called knock-out barrier comes into play. If the share price touches the knock-out barrier, the turbo call warrant is "knocked out" and matures. The investor suffers a loss up to the total loss of the invested capital.
a) Classic Turbos
(Limited term)
The strike price at which the knock-out barrier is located is below the current underlying price in the case of a turbo call warrant and above it in the case of a turbo put warrant. If the price of the underlying asset moves in the right direction, the distance to the knock-out barrier increases (value rises).
The price consists of the difference between the current price of the underlying and the strike price in the case of a turbo call warrant, taking into account the subscription ratio.
All turbo warrants also have a financing component, of course. The amount to be financed in the case of a Classic Turbo call warrant is determined by the level of the strike price. This is fully financed by the issuer.
In addition, the liquidity risk must be financed. This describes the risk that the issuer may not be able to unwind the hedge at the strike price (should a knockout occur).
This so-called premium decreases as the term of the Turbo progresses and is partially returned to the investor in the event of premature sale.
b) Unlimited Turbos /Mini Futures (Unlimited)
The knock-out barrier is not located on the strike price, but is located upstream of it. Once the barrier is reached, the securities mature immediately and a residual value is paid out.
Residual value= Difference between underlying and knock-out price.
Costs are taken into account by a daily adjustment amount, since there can be no fixed final maturity. This is again composed of financing and risk costs. In the case of a turbo call, the adjustment amount will usually lead to a daily increase of the strike price - also on holidays and weekends.
At the beginning of a new trading month, the knock-out barrier is tightened, so that the risk increases steadily while the underlying remains stable.
The price should therefore move with increasing volume in a direction that is intended, not slowly over several months. An Unlimited Turbo is not really suitable for this.
c) Smart Turbos
Sound first like the dream of each Traders: function in principle after the principle of the Unlimited Turbos, BUT a reaching of the upstream Knock Out barrier during the trading time of the basic value does not play a role!
Only if ...
...the price touches the underlying, the warrant is still knocked out.
...the index closing level has reached the knock-out barrier, the warrant is knocked out.
d) Best Turbos/ Open End Turbos
Is in principle the mixture of a Classic Turbo warrant and a Mini Future. They are issued without a maturity limit AND strike price = knock-out barrier.
Thus, the warrant behaves like the Classic variant in terms of knock-out barrier and like the Unlimited Turbo warrants in terms of financing costs.
Consequence of this mixture: Open Enn Turbos can generate the highest leverage, since this can be fully exploited by the characteristics (it is not reduced by a higher or lower Knock and it can theoretically continue to run without time restriction).
https://www.sg-zertifikate.de/knock-out-produkte
