Turbo warrant


A 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. This type of products is actively traded among investors in Europe and Hong Kong, which is partially due to the fact that it can cater to individual investors' behavioral biases.
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 ; and forms with no fixed maturity.
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.

Markets

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 Générale 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.

Hong Kong Market

Turbo warrants were introduced to the Hong Kong Stock Exchange in 2006 in the name of Callable Bullish/Bearish Contracts. By the end of 2011, turnover of CBBC comprises 10.84% of HKEx main board turnover.

Price calculation

Since the price of a turbo warrant behaves like a future contract, we could say that a turbo is expensive or not related to its future contract.
Example:
Time 1 year

Benchmark interest rates at 2%

Stock ACME current price $10 dividend 5%

Future contract =10-+= $9.7

Turbo CALL 1 year parity 1:1 strike at $9 and bid-ask prices:0.98-1 ->related price=9+1=$10
After 1 year :
$8$10$12
Stock8+d-10=-1.510+d-10=+0.512+d-10=+2.5
Future8-9.7=-1.710-9.7=+0.312-9.7=+2.3
Turbo8-10=-210-10=+012-10=+2

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