Turbo warrant
Encyclopedia
Turbo warrant is a kind of stock option. Specifically, it is a barrier option
of the Down and Out type. It is similar to a vanilla contract, but with two additional features: It has a low vega, meaning that the option price is much less affected by the implied volatility
of the stock market
, and it is highly geared due to the possibility of knockout.
The strike price
of the option is generally the same as the barrier
: if the stock hits the barrier, the option expires and becomes worthless. Variations on turbos include: forms where the strike and barrier are not identical; forms where the barrier is only active at, for example, the close of business but the strike is continuously monitored (smart turbos); and forms with no fixed maturity (minis).
For comparison, a regular call option
will have a positive value at expiry whenever the spot price settles above the strike price. A turbo will have a positive value at expiry when the spot settle above the strike AND the spot has never fallen below the strike during the life of the option (if it had done so the option would have crossed the barrier (=strike) and would have become worthless).
listed the first 40 turbo warrants on the Nordic Growth Market Nordic Derivatives Exchange. During February 2005 turbo warrant trading revenue was 31 million kronor, 56% of total NGM trading revenue of 55 million kronor.
Barrier option
In finance, a barrier option is a financial derivative which either springs into existence upon the occurrence of the event of the price of the underlying asset breaching a barrier or whose existence is extinguished upon the occurrence of the event of the price of the underlying asset breaching a...
of the Down and Out type. It is similar to a vanilla contract, but with two additional features: It has a low vega, meaning that the option price is much less affected by the implied volatility
Implied volatility
In financial mathematics, the implied volatility of an option contract is the volatility of the price of the underlying security that is implied by the market price of the option based on an option pricing model. In other words, it is the volatility that, when used in a particular pricing model,...
of the stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
, and it is highly geared due to the possibility of knockout.
The strike price
Strike price
In options, the strike price is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at the strike price, regardless of the spot price of the underlying instrument at that time.Formally, the strike...
of the option is generally the same as the barrier
Barrier
A barrier or barricade is a physical structure which blocks or impedes something.Barrier may also refer to:-Physical barriers:* Automatic full barriers, which serve to block roads at railway crossings...
: if the stock hits the barrier, the option expires and becomes worthless. Variations on turbos include: forms where the strike and barrier are not identical; forms where the barrier is only active at, for example, the close of business but the strike is continuously monitored (smart turbos); and forms with no fixed maturity (minis).
For comparison, a regular call option
Call option
A call option, often simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option. The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument from the seller...
will have a positive value at expiry whenever the spot price settles above the strike price. A turbo will have a positive value at expiry when the spot settle above the strike AND the spot has never fallen below the strike during the life of the option (if it had done so the option would have crossed the barrier (=strike) and would have become worthless).
Market
The first turbo warrants appeared in late 2001. In Germany, buying and selling turbo warrants constitute 50% of all speculative derivatives trading. They are mainly sold to a retail clientele looking for high leverage.Nordic Growth Market
At the end of February 2005, Société GénéraleSociété Générale
Société Générale S.A. is a large European Bank and a major Financial Services company that has a substantial global presence. Its registered office is on Boulevard Haussmann in the 9th arrondissement of Paris, while its head office is in the Tours Société Générale in the business district of La...
listed the first 40 turbo warrants on the Nordic Growth Market Nordic Derivatives Exchange. During February 2005 turbo warrant trading revenue was 31 million kronor, 56% of total NGM trading revenue of 55 million kronor.
Exchanges
Securities exchanges that trade this product.- Euwax – Stuttgart
- SMART Market – Frankfurt
- Nordic Growth Market Nordic Derivatives Exchange (NGM, NDX)