Knock-out certificates - simply explained
KO certificates are leveraged products for speculation on falling or rising prices.
The aim of the certificate is to price development of an underlying asset in leveraged form.
Underlyings can be for example:
- Shares (Apple)
- Indices (Dax)
- Currencies (EUR/USD)
- Commodities (Gold)
Advantages:
- KO certificates reflect the price development proportionally according to the leverage used
- The investor's loss never exceeds the invested capital
- Due to the leverage used, KO certificates yield at best very good returns
Disadvantages:
- Certificates are associated with an issuer risk
- If certificates fall below or exceed the KO threshold by even one cent, this results in a total loss, even if the price subsequently develops extremely favorably.
- The calculation of the KO distance and the appropriate leverage is not easy for newcomers.
As mentioned at the beginning, one can act on both price directions bets:
- LONG-certificates -> for the speculation on rising prices
- SHORT-certificates -> for speculation on falling falling prices
Example long:
Underlying: Apple | Current price: 140 € | KO threshold: 120 €
- If the value of the Apple share rises to 150€ I make book profits
- If the share price falls to 125€, I only have a book loss. book loss
- If the share price reaches the threshold of 120€ or falls below, I suffer a total loss
Example short:
Underlying: Apple | Current price: 140 € | KO threshold: 160 €
- If the price of the Apple share falls to 120 €, I make a book profit
- If the price rises to 150€, I only have a book loss for the time being book loss
- If the price rises to the threshold of 160€ or rises over it, I suffer a total loss.
KO certificates can have have different designations (e.g. open-end KO certificates, turbo certificates, mini-futures, etc.). There are small differences here, but I will not go into them further!
Risk note: Knock-out certificates are highly speculative and a total loss is possible.
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