Leverage Products without Knock-Out

As the name suggests, the two key aspects of leveraged products without knock-out are the leverage and the absence of a knock-out. The leverage indicates that, with a relatively small capital input, investors can participate in the price performance of selected underlying assets to an above-average extent. Since leveraged products react disproportionately to price movements in the underlying asset, they can be used both by investors who are willing to take risks in the short-term/speculative range and by investors with a long-term outlook, in order to hedge existing positions. Lastly, the absence of a knock-out indicates that leveraged products without knock-out cannot terminate prematurely. This is because they always have a fixed maturity, unlike leveraged products with knock-out. Traditional UBS warrants and UBS discount warrants are examples of leveraged products without knock-out. 



Overview

Warrant (2100)

Spread Warrant (2110)
 


 

UBS Warrant

SVSP: Warrant (2100)

Payoff diagramm UBS Warrant (Warrant)


With UBS Warrants, investors who are willing to take risks can choose between Call and Put Warrants. Call Warrants benefit from rising prices of the underlying asset whereas Put Warrants rely on falling prices of the underlying asset, as a Call Warrant guarantees the right to buy a specific underlying asset (e.g. equities, indices, currency pairs, interest rates, commodities) at a fixed strike price. A Put Warrant, on the other hand, contains the right to sell a specific underlying asset at a fixed strike price. An American-style option lets you buy or sell the underlying at any time; a European-style option on the other hand can only be exercised on the expiration date.

Warrants are securitized options and have a leveraging effect. Investors thus participate in the underlying asset’s performance, but only use the option price. And the price is only a fraction of the cost of the underlying asset. Leverage can, however, work in the opposite direction. If investors misjudge the market, they can lose all of their initial outlay.

Option prices depend on several variables, namely the residual term, the price of the underlying asset and its implied volatility, the interest rates and any dividends of the underlying asset. All these factors are used to calculate the option price and can affect it positively or negatively. Option prices can respond violently to small changes in a factor.

You can find a more detailed product description of UBS Warrants in our brochure.

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UBS Discount Warrant

SVSP: Spread Warrant (2110)

Payoff diagramm UBS Discount Warrant (Spread Warrant)

With UBS Discount Warrants, investors who are willing to take risks can already profit from small price movements of the underlying asset (e.g. equities, indices, currency pairs, interest rates, commodities). UBS Discount Call and Put Warrants are much like standard Warrants. The difference is that there are Discount Warrants at discount prices. Discount Warrants thus are cheaper to buy than conventional Warrants, although earnings are subject to an upper limit (cap).

The price of a Discount Warrant behaves differently from a traditional Warrant during the term. If the underlying assets stay within a fairly narrow corridor, investors can capitalize on price movements with Discount Warrants in much the same way as with conventional Warrants – except they pay less and so use more leverage. To generate the same profit with a traditional Warrant, the price movement must be much more drastic. But watch out: if the values of underlying assets change more drastically than expected in the right direction (for the investor), the earnings potential with Discount Warrants is limited. In turbulent periods, investors are generally better off with conventional Warrants.

Investors should also keep in mind that the leverage also as an effect in the undesired price direction of the underlying asset, so that the invested capital could be lost (total loss possible) During the term, factors such as implied volatility, interest rates, the residual term and any dividends could also have an influence on the value of Discount Warrants in addition to the price of the underlying asset. This influence can be positive as well as negative.

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