I understand how knock in barriers work. But what do geared put in a structured note mean? My understanding is in a geared put vs a regular knock in barrier, the loss for the investor is higher if the barrier is breached as the gearing quotient comes into play. So for example @ a 50% barrier, in a geared put option, the investor loss would double in case of a barrier breach? Can someone confirm this?
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1$\begingroup$ What have you tried yourself to answer this question? $\endgroup$– Bob Jansen ♦Commented Oct 28, 2020 at 8:18
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$\begingroup$ My understanding is that once the barrier is breached in note with a geared put, the investor ends up paying more than a regular knock in option as the loss participation is geared. So for example at a 50% barrier breach the loss participation rate wud be double? $\endgroup$– GirishCommented Oct 28, 2020 at 10:16
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1$\begingroup$ Thank you for showing some effort. $\endgroup$– Bob Jansen ♦Commented Oct 28, 2020 at 11:06
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1$\begingroup$ "Gearing" is a pretty generic term that means leverage, a multiplicative factor to some quantity, so I don't believe "geared put" is a standard term with unambiguous meaning, though some people might interpret it your way. For example, in this article, the author defines a geared put in a way which matches your question, namely the loss once the barrier $B$ has been breached is $100\%/B$, which for $B=50\%$ does give a gearing of 2 as in your example. $\endgroup$– Daneel OlivawCommented Oct 28, 2020 at 13:04
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1$\begingroup$ Note that in the example above, it was arbitrarily chosen that the gearing or leverage factor $g$ is equal to $100\%/B$, but it could also have been set arbitrarily to $g=3$, $g=B/100\%$ or whatever. A gearing is merely a multiplicative factor. $\endgroup$– Daneel OlivawCommented Oct 28, 2020 at 13:09
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My understanding of a "geared put structure" is that it is a bought ATM put option on a stock, whereby the ATM put-option buyer sells (at the same time) some OTM puts. The number of OTM puts sold is greater than the ATM puts, to make the pay-off function decrease to zero linearly. The structure buyer owns the underlying stock and buys the structure for additional protection.
I found the following pay-off chart on the internet, which depicts the geared Put structure pay-off. The pink line is the underlying stock, and the blue function is the geared put structure pay-off (which consists of the geared put + the underlying stock)
From the diagram, and the explanation given above, I conclude that a geared put structure is quite different to a barrier option, which simply kicks-in or knocks out at a certain price level.
I look forward to answers and comments from other contributors, who might have more experience with this particular structure.
answered Oct 28, 2020 at 12:06