The turbo warrant is a type of warrant , a financial derivative that grants a purchase or sale right to its buyer. It is a product with a lot of financial leverage , even more than normal warrants.
The differential characteristic of turbo warrants is that they have a level of barrier (knock out), and if the underlying asset reaches that barrier, the right of purchase is canceled and then the turbowarrant loses all its value.
Types of turbo warrants
We could distinguish between two types of turbo warrants:
- Turbo call:It is that turbo warrant that we use to invest upwards. That is, to ‘bet’ that the underlying asset is going to rise.
- Turbo put:It is that turbo warrant that we use to invest downward. That is, to ‘bet’ that the underlying asset is going to fall.
We must keep in mind that being a type of warrant, you can only acquire the right to buy or sell. Unlike a financial option , we will not be able to sell the right.
Barrier level of the turbo warrant
When we say ITM we mean ‘in the money’. That is, it is within the money. For example, if we buy a warrant at strike price and the underlying asset is 4, the warrant is ITM. Even easier, when the price is in our favor we are ITM.
On the contrary, when we say that we are OTM, we do not mean ‘out the money’. That is, out of the money. For example, if we buy a warrant at strike price 3, and the underlying asset is 2, the warrant is OTM. In this case, OTM would occur when the price is going against us.
Advantages and disadvantages of turbo warrants
Turbo warrants have advantages and disadvantages. I mean, they have their good things and their bad things. Below are the advantages and disadvantages of turbo warrants:
Advantages of turbo warrants
- It is not necessary to deposit guarantees
- When we exercise the turbo warrant, the assets are not delivered to us, but the losses or benefits are directly settled.
- Possibility of making long positions(Turbo call) and short positions (Turbo put).
- Having a barrier zone allows the result of the turbo warrant not to depend on the volatility of the underlying asset.
Disadvantages of turbo warrants
- It is a highly leveraged product. See leverage in derivatives
- The barrier zone or price can be an advantage, but also a disadvantage. Since, in case the price touches said price, we will lose all value.
- There is a counterparty risk when listing on OTC markets.
- Being a type of warrant with special characteristics, not as many assets are available as in the case of warrants.