0
$\begingroup$

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?

$\endgroup$
7
  • 1
    $\begingroup$ What have you tried yourself to answer this question? $\endgroup$ – Bob Jansen Oct 28 '20 at 8:18
  • $\begingroup$ 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? $\endgroup$ – Girish Oct 28 '20 at 10:16
  • 1
    $\begingroup$ Thank you for showing some effort. $\endgroup$ – Bob Jansen Oct 28 '20 at 11:06
  • 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 Olivaw Oct 28 '20 at 13:04
  • 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 Olivaw Oct 28 '20 at 13:09
2
$\begingroup$

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.

enter image description here

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.