I know this is more a trading/gambling topic than investing, but humor me please.
I read about call/put options here all the time, but I've never once seen anyone mention more "exotic" derivatives like Knock Out warrants (which I discovered through my broker recently).
I'm curious if people don't use them because they feel they're an inferior choice, because their broker simply doesn't have them and they haven't heard of them, or another reason.
(In simple terms, A KO C 12/99 warrant is like a call option (but issued by a bank) that doesn't have a time limit, doesn't have time or volatility value (no greeks), but does have a KO limit where the whole contract is void if the underlying ever once crosses that point.
For example, a KO warrant on the S&P 500 index with a KO limit of 4400 would be worth around $1 at the moment because the index is at around 4500. If it rises to 4600, the warrant is worth around $2, doubling the investment while the underlying moves 2.22% (note that this is linear because basically 4400 is the new 0 and the stock is now 200 instead of 100. An 11.11% rise in S&P500 to 5000 would mean 500% profit with this specific contract (600 up from 4400).), while if it dipped to 4399 = game over.)
Seeing as you trade one kind of risk (Time decay / No volatility) for another (KO), but the profit potential is much higher than with regular calls (if going for a KO limit close to the current price, not otherwise but then it becomes pretty safe instead), I'm fairly intrigued and will try it out soon.
Thoughts?
Submitted September 09, 2021 at 03:20AM by don_cornichon https://ift.tt/3DWyADz
