What are turbo warrants?
A turbo warrant is a financial instrument that can provide a much higher return than, for example, a traditional stock investment. If you have a perception of how an underlying security will develop, then you can trade turbo warrants linked to this security and gain leverage on your investment.
The leverage effect is made possible because when trading turbo warrants, a smaller capital investment is required than if you were to buy the underlying security directly.
How do turbo warrants work?
A turbo warrant can be divided into the following parts:
- Underlying asset
- Type of warrant
- Strike price
- Maturity date
- Stop-loss level
Just like for plain-vanilla warrants, the value of a turbo warrant is linked to the development of an underlying asset. Examples of underlying assets could be a stock, an index, a commodity, or a currency.
Type of turbo warrant
A bought turbo warrant increases in value when the price of the underlying asset increases, and a sold turbo warrant increases in value when the price of the underlying asset decreases. This means that with turbo warrants, you can create a return regardless of whether the underlying asset goes up or down, provided you are right in your market belief.
The strike price indicates the value the underlying asset must have on the maturity date for the turbo warrant to have value. For a bought turbo warrant, if the underlying asset has a higher value than the strike price on the maturity date, then your bought turbo warrant has value, otherwise not. For a sold turbo warrant, if the underlying asset has a lower value than the strike price on the maturity date, then your sold turbo warrant has value, otherwise not.
Turbo warrants have a limited lifespan, or maturity, up to a specified maturity date. After the maturity date, the turbo warrant expires and is delisted from the stock exchange.
Unlike a plain-vanilla warrant, a turbo warrant can be knocked out and delisted before the maturity date. This happens if the value of the underlying asset reaches the price that constitutes the turbo warrant's designated barrier, also known as the stop-loss level or knock-out level. When this level is touched at any time during the turbo warrant's lifespan, trading in the instrument ceases. Thereafter, a period of typically 3-6 hours starts during which the final value of the turbo warrant is determined by the issuer. If there is a value, it will be used as the basis for payments to the holder's securities account.
The value of a turbo warrant depends mainly on the development of the underlying asset. The conditions for a turbo warrant are set on the issuance date so that the turbo always has a real value. This means that for a bought turbo, the price of the underlying asset is higher than the strike price, and for a sold turbo, the price of the underlying asset is lower than the strike price.
The barrier, or stop-loss level, ensures that the condition always applies because this level for a bought turbo is either above or equal to the strike price. For a sold turbo, the level is either below or equal to the strike price.
The value on the maturity date is calculated as follows:
- Bought turbo warrant = (Price of underlying asset - Strike price) / parity
- Sold turbo warrant = (Strike price - Price of underlying asset) / parity
The parity indicates how many turbo warrants are needed to control an underlying asset. The value during the term will differ slightly from the value on the expiration date. The main reason for this is that the issuer incurs an interest cost by "borrowing" money from you to create the leverage in the turbo warrant. The value at any potential stop-loss level will depend on a so-called reference price. The reference price is read during a reference period (usually 3-6 hours) and refers to the lowest quoted price (buy turbo warrant) or highest quoted price (sell turbo warrant) that the underlying asset reaches during the reference period. However, in some turbo warrants, the barrier level is equal to the redemption price, which means that there is no value left if the underlying asset reaches this level.
To calculate the final value, the following formulas can be used:
- Buy turbo warrant = (Reference price - redemption price) / parity
- Sell turbo warrant = (Redemption price - reference price) / parity
The leverage indicates how much the value of the turbo warrant is expected to change in relation to the underlying asset. A turbo warrant with a leverage of 5 is expected to change 5 times as much as the underlying asset.
Elasticity indicates how much the value of the turbo is expected to change in percentage when the underlying asset moves by one percent.
Delta indicates how much the turbo warrant should move in kronor when the underlying asset moves by one krona. For turbo warrants, delta is always close to 1, which means that the turbo follows the underlying asset "one-to-one" in kronor.
Choosing a turbo warrant
The following steps should be taken in the choice of a turbo warrant as an investment:
- Choose underlying asset.
- Choose the direction you think the underlying asset will move (determines whether you should buy a buy turbo or a sell turbo).
- Decide on the leverage you want and therefore the degree of risk you are willing to take. The higher the leverage, the closer the underlying asset will be to the stop-loss level. This means that the risk increases with the leverage.
- The turbo is knocked out/delisted if it ever reaches the stop-loss level during the term.
- An investment in turbo warrants involves high risk.
Unlike regular warrants, turbo warrants are marginally affected by changes in implied volatility. Implied volatility expresses the issuer's future expectations of movements in the underlying asset. This makes many see the turbo warrant as a suitable trading instrument since it moves almost one-to-one with the underlying asset.
What risk is involved in trading turbo warrants?
Trading turbo warrants involves high risk. The leverage effect works both ways and you can lose your entire invested capital, but never more.
How do I trade turbo warrants?
You can trade turbo warrants through your bank or broker.