One or the other would probably like to have all the wisdom I have spread on the subject summarized in one post. But since you can only insert 1 trade in each post, I will probably have to leave out the trades. We'll see if it's enough for a best of, as some people would like. Otherwise, those interested will just have to copy it and save it for future reference 😉🌞
Part 1
First of all, I would like to deal with what I consider to be the simplest and least risky form of derivatives, as they are relatively easy to trade and track without much effort.
In general, almost all forms of derivatives are available as calls (for rising prices) and puts (for falling prices).
So let's start today with the discount calls. I currently have 2 of them in my portfolio. More on this later.
Discount calls always relate to a specific underlying (here I am concentrating on shares).
There are always 2 fixed values. A lower limit (strike price) and a maximum limit (cap), so to speak.
Discount calls are suitable for those who expect a value to move sideways or, in the case of the call, only a moderate increase until the end of the term.
As there are many fans of $NOVO B (-3.1%) my first example is for this share.
The call below, which I bought today😉 , has a strike price of DKK 400 and a cap of DKK 450.
The term is until 19.12.25. That is also the crucial day. The value of the bill will be decided on this day. Anything that happens before then is of no interest. The maximum repayment would be DKK 50, i.e. around €0.67. This would be the case if $NOVO B (-3.1%) would be at least DKK 450 on the record date. That would be around 80% of the current purchase price of the certificate of €0.37.
This means that since the share is currently at exactly this level, you would make a profit of 80%, even if the share is no higher in December than it is now. This is paid for by the fact that even if the share doubles, you won't get any more
On the other hand, a total loss can occur if the share is below DKK 400 on December 19.
If it is between DKK 400 and DKK 450 on that day, you will receive the exact difference between the basis and the actual price. The breakeven for this position is therefore around DKK 430 at today's call price. The share should at least be at this level on 19.12. In my opinion, this is a very realistic opportunity. Of course, you can also sell the derivative in the meantime. The more the share rises above the cap, the closer the price of the call comes to the maximum amount.
I always trade discount calls when I'm not sure which way the share will go. I always have the premise that I expect a return of at least 10% per month, which is the case with a 7-month term.
It can also be much riskier. You can see this in the 2nd attached trade that I made yesterday.
This is a discount call on $PYPL (-0.04%) . This also has a term until 17.12. The base price here is 85$ and the cap is 90$. The maximum repayment here is 5$, i.e. around 4.25€. Calculated on the purchase price, this means a maximum possible return of 270%. To achieve this, however, the share price must rise by 25% by December. This would correspond to a leverage of 11 for other derivatives. However, without an interim KO.
Even if interim price losses do not mean the end, you should also work with SL here. However, I would not deposit these with the broker, as the risk of being stopped out if the issuer plays around is relatively high.
I always have a stop of 20% in my head, but I keep it flexible and look at how the share price has fallen.
So enough for now with part 1, I hope I was able to give you some information. You are welcome to ask questions, or those who notice something that is still important to mention are welcome to add to it.
I am not a finfluencer and anything but omniscient.
Derivatives Trading Part 2
I'm going to focus on one of my favorite but generally not very widespread types of derivatives, namely inline OS. There is no long or short here, as they are suitable for sideways phases.
With inline OSs such as the one shown here, there is a range within which the underlying must move over the entire term. If the upper or lower limit is breached, the bond expires worthless. However, if it remains within the range for the entire term, the bill is always redeemed at € 10 at the end. The bill below is based on the €/SFR rate (0.92/0.97) and runs until June 5, i.e. 2 weeks. I bought it at €1.90 when it was quite close to the lower limit. I mostly trade currency pairs or oil with these bills. Stocks also work, but I would only take large stocks. I currently have one on $BNTX and $RHM since last week. Smaller, more market-oriented stocks can easily be pushed over the barrier by the issuer if they are close to one of the limits. That's why I stay away from them.
So the topic is relatively easy to deal with. Nevertheless, I hope it has been informative for you. If you have any questions about this very interesting product, please feel free to ask.
Derivatives Trading Part 3
Today I would like to focus on what is probably the most widespread and longest existing derivative. This is the classic warrant.
For me, this is the most demanding product, especially in terms of selection, because there are the most parameters to consider.
I will explain the various parameters using an OS that I currently have active in my portfolio.
Basically, I first have to decide whether to buy a call (rising prices) or a put (falling prices).
Then I have to decide which strike price to choose. This depends on how I expect the price of the underlying to develop. And, of course, the term of the bond.
I usually choose bills that are further out of the money (the strike price is higher than the current price)
In the attached case of the bill on broadcom, the strike price is $325, i.e. over 40% above Friday's price of $225. So the bill is quite far out of the money, but this means that it has a high leverage of currently almost 30. Nevertheless, the position is up over 109%. However, the leverage is not as meaningful with OS as with KO warrants, which is due to the fact that the shorter the term, the more the premium is reduced, so that 1% price increase does not automatically amount to 30% in the warrant.
As a rule of thumb, the shorter the remaining term, the closer the strike price should be to the current price. The risk with OS is not a knock-out, but rather an expiry date on which the bill only has the intrinsic value, i.e. the difference between the share price and the strike price, adjusted for the subscription ratio. If the share price is below the strike price at maturity, the bill would be arithmetically worthless.
The subscription ratio is also important for OS. This means how many OS I need to buy/sell 1 share. In most cases, this is 10:1 or 100:1.
The bill I am trading has a subscription ratio of 10:1 and a remaining term until December. My intention when trading OS is always medium-term, i.e. 3-6 months. I never hold the bills until expiry and almost always take bills that are well out of the money and with at least 6 months to maturity. As soon as my price target is reached, I sell the OS. Another important point in the pricing of OS by the issuer is the so-called implied volatility. This refers to the fluctuation range of the share that the issuer assumes at that moment. This means that the higher the volatility of the share, the higher the premium and thus the value of the OS, without the share having to move. The same applies the other way round, of course.
Personally, I find OS a good addition and would rate them as the least offensive in the derivatives area in terms of risk, behind the discount certificates already discussed in Part 1, as I can also take certificates that are already in the money to limit risk, i.e. the current share price is above the strike price of the OS. If this is the case, the certificate already has an intrinsic value, which is not the case with my certificate below. Of course, this reduces the opportunity and risk.
Part 4
In the last part of my little series, I will be looking at the very popular Turbo bills, also known as KO bills.
First of all, I would like to say that there are currently none in my portfolio, so I have added the last trade with this class.
I can use this to illustrate my approach very well.
First of all, this class also offers the opportunity to trade on rising or falling prices. The risk and the chances of profit are very high in this product, as they can lead to total loss as well as to 2-3 digit % profits within hours / days. The key figures are very easy to understand, as there is a KO price and a subscription ratio. In the case of the bill below, a short on a falling price, the KO was $350, when I bought it the share was at $325. At the time of purchase, I assumed that the share price would fall. But if it had gone the other way, the bill would have expired worthless at 350$.
I only used KO certificates for short-term trades of a few hours to a few days. The advantage of KO warrants in contrast to normal warrants is primarily that they have an unlimited term and no to minimal premium. This means that there is no time value for these warrants, but they always have an intrinsic value, namely the difference between the current price and the KO. However, the issuer recoups the costs by adjusting the KO price on a weekly basis over time. This is not much, and is not significant if you only hold this product for a short time.
The next thing to note is that the closer the current price is to the KO, the greater the risk and reward.
Now we come to the strategy that I use with KO. First of all, it is important for me that the share has a high volatility (fluctuation). This is the best way to achieve high profits in a short period of time.
Let me explain this using the practical example of $UNH , which I traded twice recently. This share, which is actually one of the blue chips in the American healthcare sector, had already experienced an unprecedented decline when I started trading it. It had fallen from over 600$ to around 325$ within a few months. When it stood at $312 on the Wednesday before last, I took a look at the share and considered a long strategy. Either the 300$ mark would hold until the end of the week, in which case I would have gone long on Monday, or if it didn't hold, it would fall to 250$, was my assumption. When the rumors about the fraud allegations came out the next day, it fell to $250. That was the ideal entry point for me. I chose a long Ko schei with a KO of $244, very close to the current price, with an SL at around $247. The stock turned around in the next 2 days and almost went back up to $325. I held this ticket up to $315 and then sold it after 2 days with a profit of 310%. At that time, however, I already had my trade below in view. I assumed that the rebound of the stock would continue until the beginning of the last sell-off at 325$. After the stock failed on the first attempt exactly at this level, I entered short with the trade below. As I wasn't quite so sure this time whether it wouldn't go above the mark in the short term, I chose a further distance to the KO at 350$. But it went in the right direction for me again and I was able to realize a 50% profit after only 20 hours. My exit scenario was again the 300$. If the share had slipped below this level again on a sustained basis, I would have kept the ticket. Since it didn't, I stuck to my scenario and sold, even though I would have made about 15% more profit in the meantime.
I am not describing this approach in such detail because of the exceptionally high profits, but because it shows the most important rule for me, which I always follow when trading derivatives. If you want to trade successfully, you need a strategy, i.e. fixed entry and exit scenarios and, even more importantly, the discipline and consistency to stick to it, regardless of what others say at the time. Thoughts like it could go up again or I could make a lot more profit usually lead to a worse result. I also set myself fixed limits right from the start as to how much loss I'm prepared to suffer and I stick to them. It is usually between 20/25%. If a trade goes against me right from the start, which also happens, I sell the ticket at a loss. If I am 20% in profit, I raise the stop price to the purchase price. However, everyone has to decide for themselves when to secure profits. Normally, I never use more than 2% of my portfolio value per trade for KO trades.
I would like to emphasize this once again. These products are absolutely unsuitable for beginners and if you want to gain your first experience with derivatives, do not take KO certificates, but start with discounters or warrants that are well in the money. Be satisfied with a 2 or 3 times leverage and not 8 or 12 times like I often do. By the way, leverage means that if the share rises by 1%, for example, the warrant rises by 2.3% or, in my case, by 8 or 12%. The other way around, of course, is also true.
And now let's take another brief look at how derivatives can contribute to diversification with a relatively small portfolio volume.
and how do I illustrate this with a small portfolio volume?
The word "portfolio" is important! I don't want to start a discussion here about whether real estate, ships, vintage cars and Pokemon cards belong in this category.
I have had a few thoughts on the subject, which are admittedly based on evaluations of my own portfolio.
Many people who follow my posts here probably think I'm a gambler, although the pure short-term derivative trades are clearly in the minority. I consider my portfolio to be fairly well diversified and I base this on a very simple point.
There is almost never a day when all stocks are green or all stocks are red. Why does that speak for diversification? Well, how many days have there been where all MSCI World stocks, commodities such as gold, oil, Bitcoin, all sector indices etc. have risen? I haven't counted them, but there probably weren't many. This means to me that portfolios where all stocks are often green or red cannot be sufficiently diversified.
Is that a logical approach?
And now a few more thoughts on why I trade relatively heavily in derivatives. Of course, the main point is that I can't otherwise achieve my goal of turning €3,000 into €100,000 in a maximum of 10 years without making large deposits.
At the beginning, a good 2 years ago with €3,000, I didn't have the capital to invest broadly and diversified in shares. Now that my portfolio value has increased to €15,000 over the past two years, it looks better, but you still can't make big leaps with it. So I use the vehicle of derivatives to invest broadly, especially in growth stocks, so that I can still invest in these companies.
I use either long-dated OS with a remaining term of more than 12 months or turbo certificates that run indefinitely. In contrast to short-term trades, I then use lower leverage, as the focus is not necessarily on quick profits, but on medium to long-term participation in the company's growth and the associated price increases.
I also take advantage of the opportunity to change the OS when it approaches maturity. On the one hand, this gives me a potentially higher return than with the old certificate with the short remaining term and I can continue to participate in the positive performance of the share.
For example, if a share costs €500 and I would only buy 10 shares because I like the company and am convinced in the long term, this would tie up a third of my portfolio. With a subscription ratio of 10:1, I would get an appropriate OS for around €8. So if you leave out the premium and leverage, I get the same opportunity for €800 as I would for €5,000.
Of course, this only works for growth stocks and not if I am looking for dividends.
I would also like to show you a practical example.
For example, if I want to play the quantum technology theme in the long term, I think $IBM is a very interesting opportunity. For me, the medium to long term is an absolute top investment. That's why I bought an OS back in April, but it only had 8 months to run, so I'll be switching soon.
The share was at around €200 at the time. The OS was at €0.85. So I only paid slightly more for this investment with my original purchase of 300 shares than if I had bought 1 share.
However, as the profit is not the main point of this article, but rather how I can invest in more expensive quality companies in a broadly diversified manner even with a smaller portfolio volume, I will leave it out now. If you are interested, you can work it out for yourself.
So I hope I haven't bored you too much with my thoughts and strategies on the subject of diversification. By the way, there is of course one more tip. Despite all the caution in selecting these longer-term investments, derivatives are of course always riskier than a direct investment in shares. You should of course bear this in mind.
And now I wish you a nice hot start to the weekend.
I am including the last trade here as it is the most recent.
