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I have only basic limited knowledge about financial derivatives and I did not find exactly what I was searching for. I found open end turbo call, knock outs, but I am searching for this:

Underlying should be a regular "famous" stock e.g. in German DAX, let's consider BMW.

Based on this underlying I am searching for a derivative which does the following:

  • In a long position I want to have a leverage factor of about 5 to 20. So if the stock increases by one unit (percent) the the value of my position should increase by factor 5 resp. factor 20 (percent). If it decreases of course I loose by this factor.
  • Second I want to have a constant factor. This factor should not change and stay stable over the complete investment time.
  • Third I want to have it open end. So I want to hold it for quite a long time and stay flexible to be able to sell whenever I want, lets say quite long means 2-5 years.
  • It should have no knock-out.
  • Ideally there shouldn't be any payments in between. So I buy and I sell, but no dividend or so. But this is not so important.

How is this called? Can you give me a tradeable example for BMW?

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  • $\begingroup$ Futures and FOREX contracts are like this, but I don't think you can do it with a regular stock. It would effectively be like buying on 5-20% margin and not paying interest. Or you could simply invest 5-20 times as much money. $\endgroup$
    – user59
    Feb 11, 2016 at 21:20
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    $\begingroup$ Sounds like you need a broker who will allow you to buy on margin of 1/5 to 1/20 of the value of the securities. I have no idea if this is possible. $\endgroup$
    – nbbo2
    Feb 12, 2016 at 15:26
  • $\begingroup$ What do you mean by selling? Execute the option, or sell the option? What do you mean by constant factor? $\endgroup$
    – arodrisa
    Feb 17, 2016 at 13:30
  • $\begingroup$ Can you please clarify what you mean by the second bullet point "constant factor"? $\endgroup$
    – Todd Page
    Feb 18, 2016 at 15:16
  • $\begingroup$ @ToddPage Hi Todd! I mean that the leverage factor should be constant. Most typical knock-out contracts or option based derivatives have a certain leverage factor, but on a long time it is not constant. There are rolling turbos where there is adjusting that constant factor is indeed the case, but they have a knock out. $\endgroup$
    – Stat Tistician
    Feb 21, 2016 at 20:11

7 Answers 7

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Here is an example of such a product in Europe. (I don't personally own or recommend them., there are also other such issuers.)

Commerzbank Faktor certificates: These should meet all your requirements, range of -10x to +10x constant leverage, open ended, no dividends, no knock-out's as well.

http://www.certificats.commerzbank.ch/SiteContent/11/5/2/725/41/Faktor_QuickGuide_A4_Eng.pdf

Index Example:

http://zertifikate.finanztreff.de/dvt_einzelkurs_uebersicht.htn?seite=zertifikate&i=35002894

Single Name Example's:

BMW: http://zertifikate.commerzbank.de/Products/ProductDetailsDownloadPIB.aspx?type=pib&isin=DE000CZ6RQ37

DB: http://zertifikat.finanzen.net/optionsscheine/Auf-Deutsche-Bank-AG/CZ0VVR

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  • $\begingroup$ Thank you very much, especially for the detailed links. However I really need that I can sell/execute whenever I want and that I make the decision. In the manual of the product it says: "Zudem trägt der Anleger in beiden Fällen das Risiko ,dass zu einem für ihn ungünstigen Zeitpunkt gekündigt wird" This means that the bank can decide when they kick me out. This is not what I want, because I wan to wait, especially when there are times when I am in loss I want to wait that it goes up again, so if I get kicked out then, I am lost? $\endgroup$
    – Stat Tistician
    Feb 22, 2016 at 19:35
  • $\begingroup$ Thats why I put the restriction that I want to be flexible. But not that the broker / bank is flexible in the sense that they kick me out when they are in plus? It says: Kündigungsrecht: Ohne Angabe eines Grundes Jeweils zu einem Ausübungstag. This means without giving any reasons they can close the position? This is not what I want, because I want to decide when I sell / execute. $\endgroup$
    – Stat Tistician
    Feb 22, 2016 at 19:36
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    $\begingroup$ @StatTistician Virtually all structured products will include early redemption provisions by the issuer. You can buy/sell as much as you like as like as the notes aren't redeemed. $\endgroup$
    – pyCthon
    Feb 22, 2016 at 19:52
  • $\begingroup$ @StatTistician also redemption depends on credit worthiness of the issuer, you can find other such issuers. $\endgroup$
    – pyCthon
    Feb 22, 2016 at 20:01
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    $\begingroup$ @StatTistician: pyCthon is correct, this is the product you are looking for. $\endgroup$
    – vonjd
    Feb 22, 2016 at 20:01
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structure a bespoke total return swap where you explicitly specify the reference index, it's calculation (i.e. stock price * factor etc..), payoffs, margins etc... an example of such swap could be contract for difference (CFD).

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    $\begingroup$ Since the poster is willing to take downside as well as upside, this is the right answer. No optionality is necessary. TRS are often specified to be cancellable as the poster requests. $\endgroup$
    – Brian B
    Feb 17, 2016 at 14:11
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It could be done as a kind of Structured Product. I don't know of a specific name for this type of instrument.

From what you describe, it doesn't actually involve any optionality, just leveraged exposure to an underlying. You also mention participating in downside risk, so it's not an option.

But you do mention a 'constant factor', which you need to explain a bit more, but sounds like some kind of 'coupon'. Depending on what you mean by this, you could come up with a Structured Product that is basically a Total Return Equity Swap, plus some extra (possibly contingent) payout component.

The payoff "index" of the swap component would be defined as 5x of your underlying.

While relatively simple to price and mark to market, any reasonable dealer would probably charge a large fee to take on this risk. (Since they would have to go out and hedge this extremely leveraged position, probably using options and/or futures)

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    $\begingroup$ @pyCthon I am from Europe (Germany) and I want to trade a financial derivative which behaves as what I have described. But I don't know how this is called and if it does exist. So an tradeable example with ISIN for example would be great. $\endgroup$
    – Stat Tistician
    Feb 21, 2016 at 20:14
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    $\begingroup$ @StatTistician this is the closet you will get for retail, certificats.commerzbank.ch/SiteContent/11/5/2/725/41/… $\endgroup$
    – pyCthon
    Feb 22, 2016 at 12:37
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    $\begingroup$ @StatTistician As for one an example in the wild, zertifikate.finanztreff.de/… $\endgroup$
    – pyCthon
    Feb 22, 2016 at 12:46
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    $\begingroup$ Thanks for clarifying. The leverage in this instrument could be fixed - basically whatever you are willing to pay for and/or find someone willing to sell it to you. I could easily see a leveraged payoff function using a fixed (e.g. 5x) multiplier. Just be prepared to pay for it. $\endgroup$
    – Todd Page
    Feb 22, 2016 at 14:34
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    $\begingroup$ @pyCthon These Faktor certificates look just about perfect for the request. Commerzbank would probably write an OTC one for you on an individual stock. $\endgroup$
    – Todd Page
    Feb 22, 2016 at 14:52
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You may want to consider Single Stock Futures in Eurex.

BMW: http://www.eurexchange.com/exchange-en/products/equ/fut/BMW/25544

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There is no product which truly matches your requirement.

As mentioned in other answers and comments you can structure the product by using a future or a swap. However, in both cases you have an indirect knock-out which is when you receive a margin call requiring you to provide additional funds. You will always have this problem as you essentially borrow money. In addition, a future will have to be rolled into the next contract.

If you choose to buy options, as suggested by some, you do not have a constant leverage. Moreover, your exposure is not symmetric and you will loose the time value of the option over time which makes this type of investment expensive.

I think you get closest to your desired product by taking out a bank loan and buying 5 or 20 shares instead of 1. If you prefer to not receive dividends you can buy zero-calls instead. However, I do not recommend to use this strategy. Also keep in mind that you will need to pay interest on the bank loan during the investment period.

If you are a retail investor, you are likely best off with an ETF. If you must, you can also buy a leveraged ETF. Leveraged ETFs do not require a margin, have no knock-out do not have a fixed maturity. However, ETFs are usually not available for single stocks.

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  • $\begingroup$ "However, in both cases you have an indirect knock-out which is when you receive a margin call requiring you to provide additional funds." Well, this makes actually sense. Ok, so I do have an indirect knock-out: E.g. if I take a long position and the underlying goes down very very strong at some timepoint I will anticipate that much leveraged loss that my investment is basically down to zero. Yes that is actually right. $\endgroup$
    – Stat Tistician
    Feb 21, 2016 at 20:19
  • $\begingroup$ "I think you get closest to your desired product by taking out a bank loan and buying 5 or 20 shares instead of 1." Is there a broker e.g. Interactive Brokers which offers me this as an additional option? So e.g. if I invest 5000 US Dollar into a stock, Interactive Brokers offers me a leverage of 20? Does this exist and what is the maximum leverage for, lets say 5000 US Dollar what they give me? But at a certain timepoint if underlying goes down and I am long they will have to close my position or ask for more money? $\endgroup$
    – Stat Tistician
    Feb 21, 2016 at 20:20
  • $\begingroup$ And can I do the same for zero-calls? So does interactive brokers offer me a zero-call for e.g. Deutsche Bank which I can buy with 5000 US Dollar and have it leveraged by a factor of 20? $\endgroup$
    – Stat Tistician
    Feb 21, 2016 at 20:27
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    $\begingroup$ With taking a bank loan, I was referring to a bank loan that is unconnected to your investment. As I pointed out: I do not recommend this. I'm not familiar with Interactive Brokers, but generally you will receive a margin call once the losses of the position are larger than your provided margin. That is when you get "knocked out". A zero-call behaves exactly the same as a stock and your participation factor will be 1 (same as a stock). $\endgroup$
    – Freddorick
    Feb 22, 2016 at 14:32
  • $\begingroup$ Yes I got that with the loan, but I hoped that e.g. interacitve brokers will offer this function maybe by default upon a certain investment amount. $\endgroup$
    – Stat Tistician
    Feb 22, 2016 at 18:10
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Is much simpler, what he really want's is an exotic option. Therefore OTC. So it's name may depend on the counterparty and the condition he imposes. But regarding my comment, he needs to have clear what he wants to buy and sell. As all the conditions can be considered in the model, as long as they are determined with his counterparty.

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  • $\begingroup$ "What do you mean by selling? Execute the option, or sell the option? What do you mean by constant factor?" I have explained constant factor in the previous comments, plese see there, don't want to post a 3rd time. Regarding selling or executing: What I mean is that I want to have it open end and at a random time-point, I want to go out. So if I take long position and underlying has a positive development, I profit more than average because I have a leverage. Then at a time point which I want to choose by myself, I want to go out. $\endgroup$
    – Stat Tistician
    Feb 21, 2016 at 20:17
  • $\begingroup$ Excuse me, but you wrote Constant Factor time before you answered it. So please, don't blame me for not reading your comments, as my solution was previously posted. in order to get out of your position, you can either execute it (depending on timing, and if it is European, American or Bermuda). And again, you are talking about a made up product. Therefore the only option you have is talk to a broker and try to build it and price it (it will be very expensive), or just check CFD products, you will be able to have leverage and get in and out whenever you want. $\endgroup$
    – arodrisa
    Feb 22, 2016 at 10:42
  • $\begingroup$ Sorry, I did not want to blame you that was not my intention. $\endgroup$
    – Stat Tistician
    Feb 22, 2016 at 18:09
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I would suggest you two ways to have such exposure :-

  1. LEAPS ( Long term equity anticipation securities ) are basically long-dated options for terms like 2-3 years. They're pretty much available in form of calls and puts on common equity ticks. Options in general , as you know , provide huge leverage. Hence this satisfies all your conditions. An additional bonus feature is downside risk protection

  2. Find a broker who provides you such leverage on your investments. AFAIK , you'd have to maintain a very high margin for such condition to be in place.

Personally , I'd suggest that Option 1 would be the good way to go !

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