Turbos or Knock-Out Barrier Options
What is a Turbo ?
Turbos or Knock-Out Barrier Options are derivative products with large leverage which allow to benefit from ups and downs of the financial markets. These products are considered exotic options and are similar to Warrant contracts due to the fact that they are issued by a market maker, typically a bank. We can find Call Turbo and Put Turbo. At the expiration date, a Call Turbo (Put Turbo) offers the right for an investor to receive the difference between the underlying-asset price and the strike (difference between the strike and the underlying-asset price) provided that, during the Turbo’s contract term, the underlying-asset price don’t reached or crossed a pre-determined barrier price (the strike). If, however, this threshold is reached or crossed then the Turbo is prematuraly expired and worthless and all the additional rights are wrote off. A Turbo offers similar rights as Warrant contracts, the only difference being that there is a pre-determined barrier price for Turbos. A Call Turbo (Put Turbo) expires prematuraly if the underlying-asset price reaches or falls below (rises above) the strike. In that way, a Turbo is always issued In-The-Money.
The delta of Turbo (Delta is the ratio that compares the change in the price of an asset to the corresponding change in the price of its derivative) is close to 100%. Moreover, the price of a Turbo tends to be lower than a comparable Warrant contract. This implies that the leverage of Turbo is upper than a Warrant or than holding directly the underlying-asset. Investors can take advantage of an upper leverage by holding Turbo because it involve large risk by using a pre-determined barrier price.
One of the most interesting advantage of Turbos is the marginal impact of implied volatility and time on their value. The variations in volatility don’t affect so much the value of a Turbo because the time value is really low and implies that the impact of time is weak.
Investor profile :
Turbos fit with advised and risky investors who want to take profit from short term movments of financials markets using large leverage. Turbos are more appealing than others derivatives products like options or warrants because they tend to have cheaper price and ensure opportunities to hedge positions differently wiith the barrier price. Moreover, Turbo’s price evolution are easy to understand and offers severals types of underlying like indexes, commodities, equities or currencies.
Here is an example of Turbo’s information on the CAC40 Index :
An investor anticipate a surge of the index in the incoming days at 5,200 points.
For the same investment, at the maturity (90 days) the owner of the Call Turbo have a larger sensitivity to changes of underlying-asset price. When the CAC40 index rises by 100 points, one Call Turbo gains 1 euro worth (∆CAC40 x Parity x Delta). Nevertheless, if the index value drops to 5,000 points or under 5,000 points thus the Call Turbo worths nothing and the investor loses the total investment : 5,099.96 euros, even if the index value return above 5,000 points.
Written on 27/11/2020