SG TURBOS

SPECIAL REPORT

In association with

BUILDING UP YOUR WEALTH IS A MAJOR CONSTRUCTION PROJECT. IF YOU’RE
to be a master craftsman rather than a cowboy contractor, you need to have the best
tools for the job. A great tool is both simple and versatile. Turbos – a specially
designed derivat i ve product – possess both of these qualities, making them ideal for
private investors and traders to play the markets.
Turbos aren’t nearly as well known as other derivat i ves, such as spread betting
and contracts for difference (CFDs), so in our introductory article on pages 4-6, we
explain what they are and how they wo r k. To see how they perform versus some of
these other leading tools, we then compare turbos with the competition on page 7.
Next, we ta ke a detailed look at some of the main applications of turbos. They are
really handy for protecting the value of your actual shares from short-term dips in
the market, as we show in ‘Shelter your assets with turbos’ on pages 8-9. But they
are equally nifty instruments for raw speculation, thanks to the gearing that they
possess, as you'll find out on pages 12-13. Even if your horizons are only a few hours,
turbos are great for making big returns without taking undue risks, as John
Hughman demonstrates on pages 14- 1 5 .
There’s no better way to understand the power of turbos than to watch them in
action. Our companies editor, Simon Thompson, has made some hugely profitable
turbo recommendations this year and, on pages 16- 1 7, he shares some of his ex p e rt-
ise in this area.
Dominic Picarda,
Masterclass editor
TURBOS: SPECIAL REPORT
4 INTRODUCING TURB0S
Turbos are an ideal tool for private investors who
want to gear up their portfolios and guard against
big drops in the market.
7 TURBOS COMPARED
Derivatives share many of the same features, but
there are also important differences between them.
8 SHELTER YOUR ASSETS WITH TURBOS
David Stevenson shows how you can maintain your
portfolio’s value using turbos
12 SUPER-CHARGED RETURNS
Turbos can be used to produce powerful returns that
complement the performance of your mainstream
shares and bonds
14 TURBO ROUTE TO DAY-TRADING PROFITS
The gearing on turbos make them great for tra n s f o r m-
ing a few hours’ price movement into big profits, but
without the ex t reme risk of most other day tra d i n g
16 TRADE TURBOS LIKE A PRO
Simon Thompson reveals how he uses turbos to
g e n e ratemarket-beating re t u r n s
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SPECIAL REPORT 3
SPECIAL REPORT: TURBOS
Turbos are an ideal tool for private investors who want to gear up their portfolios
and guard against big drops in the market. David Stevenson and Dominic Picarda
explain the basics and detail the key terms you’ll need to know
Introducing turbos
W
E ALL WANT TO
make the most out
of our trading and
investment ideas.
But, to do so effectively, we often
need a bit of help. That’s where
gearing comes in. Gearing means
the ability to turn small move-
ments in an asset’s price into big
p rofits. Turbos are a perfect tool
for private investors and traders
to achieve gearing, but without
many of the drawbacks and
complications that come with
other geared pro d u c t s .
TURBOS EXPLAINED
Turbos are specially designed
p roducts that are linked to share s
and indices. When the relevant
s h a re or index goes up or down,
the turbo goes up or down with
it – but by much more. For
example, you could buy a turbo
that offers gearing of 20 times. If
the share it is linked to rises 5 per
cent, your re t u rn is 20 times that
– 100 per cent.
Of course, this gearing works
both ways. When you’re right
and the asset goes the way you
expected, you make super-sized
p rofits. But when you’re wro n g ,
you can make big losses. Wi t h
4 SPECIAL REPORT
turbos, however, your losses are
strictly limited. Once the price SHORT TURBOS
moves against you by a cert a i n
amount, your position is auto- TURBO STRIKE & KNOCKO U T E X P I RY PA R I TY
matically closed. Cru c i a l l y, you FTSE 100
can never lose more than you put T103 5,500 19/12/2008 1,000
down to begin with. T104 5,600 19/12/2008 1,000
Not only are they less risky than T105 5,700 19/12/2008 1,000
many other geared products, but
turbos are also much more DAX 30
straightforward. They trade on the T108 6,500 19/12/2008 1,000
London Stock Exchange and are T109 6,600 19/12/2008 1,000
dealt through stockbrokers, just
like shares, so you can have confi- CAC 40
dence in the prices that you see. T112 4,500 19/12/2008 1,000
And, despite being a listed pro d- T113 4,600 19/12/2008 1,000
uct, you don’t have to pay any
stamp duty when you buy them. that we’ve suff e red in 2008. This
The costs are all built into the price Turbos are makes turbos ideal for protecting
you pay when you buy your turbo your holdings of actual shares, as
– there are no charges to pay to ideal for well as for speculation.
keep the position open, unlike To understand the key features of
with some instruments. protecting turbos, let’s look at a list of some
Whether you think an asset is leading ones. In the table (above)
going up or down, turbos offer a your holdings we’ve featured the main turbo
way to make money from your shorts off e red for the major equity
view. Just as a ‘long turbo’ makes of actual markets as of early October 2008.
money if the underlying share or It is worth noting that it is still
index rises, a ‘short turbo’ profits shares early days for SG’s relaunched
if it goes down. All you have to do Turbo platform. In addition to
is buy the one that fits your out- these index-based turbos there
look. The ability to speculate on is also a small range of individ-
prices falling is valuable, especial- ual equity-based turbos. These
ly in the sort of bearish markets a re tied to Anglo American, BP,

GSK and Vodafone, with more
scheduled to launch over the
next few weeks and months.
So, how would an investor use
one of the index turbos that
appear in the table? For the
FTSE 100, there are three short
turbos with three different initial
levels, or knock-out barriers, on
the underlying index, ranging
from 5,500 to 5,700. All three
expire towards the end of
December, before Christmas.
Three months is the standard
term for a turbo. Each of these
turbos sells for a different price.
T103 costs 39.4p per turbo
while T105 costs 88p.
The potential payout and risks
attached to each of these turbos
is diff e rent – they will achieve
different outcomes given the
same move in the FTSE 100.
The fundamental diff e rence in
the risk/re t u rn profile of each
turbo is the gearing involved.
The potential upside on the
cheaper product is much gre a t e r
than that of the more expensive
p roduct. If the market keeps
falling, you’ll make much more
money from holding the cheap-
er, more highly geared short
turbo T103. The flipside is that
you will lose more money on
these more highly geared turbos
if the market goes the wrong
way, in this case upward s .
If the market price moves
against you and hits the knockout
level, your position is closed
immediately and you lose the
amount you paid for your turbo.
Had you held a short position on
the FTSE via a regular contract
for diff e rence (CFD), the potential
losses could keep on increasing.
You would soon receive a call
from the CFD broker demanding
KEY TERMS
■ Underlying: the underlying index or share
you’re buying exposure to during the three-
month term of the contract.
■ Short or long: a short turbo makes
money if the underlying asset goes down
in value, a long one makes money if it
goes up in value.
■ Knock-out: the pre-determined level at
which the turbo loses and the investor’s posi-
tion is closed. It is the same as the strike level.
A long turbo has value as long as the index is
above the knock-out level, and a short has
value as long as the index is below that level.
■ Expiry: the date in the future when the
turbo expires. Each turbo contract lasts
three months from the point of issuance.
■ Days to expiry: the time left before the
turbo expires.
■ Gearing: how much the turbo’s price
that you provide more money on
m a rgin to cover your losses.
Knowing that you are never
going to be exposed to open-
ended losses is a key benefit of
turbos compared with other
derivatives. Even if the underly-
ing market shoots through the
knock-out level, your losses are
capped. So, the FTSE could surge
t h rough a short turbo’s 5500
knock-out level, right up to, say,
5800. But the short turbo simply
gets knocked out at 5500. What
happens thereafter is irre l e v a n t
and the losing investor can sleep
easy. This sort of guaranteed
stop-loss is sometimes available
on unlisted CFDs, too – but only
TURBOS: SPECIAL REPORT
will move in response to a change in the
underlying asset. Typical gearing could be
anything between five and 100 times. In
the case of five times gearing, a 1 per cent
move in the underlying asset will result in
a 5 per cent move in the turbo.
■ Margin: the proportion of the underly-
ing index or share that you must put up as
margin to pay for the turbo.
■ Financing cost: the charge per day for
each turbo to finance the contract, which
is automatically built in to the turbo’s
price. There are no charges for the index
variety of the turbo.
■ Spread: there’s always a spread
between the buy and sell price for the
turbo. As with shares, you will always buy
at the higher price and sell at the lower
price. Usually the spread is not much
more than half a penny per turbo.
in re t u rn for an extra payment.
Once the With a turbo, it comes as stan-
d a rd, built into the starting price.
price moves You should always think care-
fully about the appr opriate
against you knock-out level when taking out a
turbo position. The first step is to
by a certain compare the knock out level with
the current price of the underlying
amount, your s h a re or index. If it is very close –
just a few per cent away – you
position is could easily find yourself knocked
out quickly if the market is very
automatically volatile. During the extreme mar-
ket turbulence of late September
closed and early October 2008, a num-
ber of freshly issued turbos were
knocked out shortly after issue,
although this is unusual.
SPECIAL REPORT 5
SPECIAL REPORT: TURBOS

In exceptionally violent mar-
kets such as these – where the
index can move 9 per cent inside
a single day – you need to
choose a realistic knock out
level. The further the price of
the underlying is from the
knock-out on your turbo, the
better. Of course, greater dis-
tance from the knock-out level
comes at a cost. The more ‘in
the money’ the turbo is, the
higher the likely purchase cost.
We’ve already said that turbo
prices reflect all the financing
costs, so that there ’s no need for
investors to worry about mak-
ing calculations from day to
day. However, it is still wort h
understanding the principles
that lie behind turbo pricing.
The process reflects the cost of
purchasing access to the under-
lying asset, such as the FTSE
100. It also contains the costs of
financing the position, as well
any dividends earned by the
underlying asset.
LONG AND SHORT TURBOS
Here’s a simple breakdown of
the structure of the prices of long
and short turbos on indices:
■ Long turbo = intrinsic value +
gap risk.
■ Short turbo = intrinsic value +
gap risk.
The intrinsic value of a turbo is
simply its share price minus the
strike price. So, for a FTSE 100
long turbo with a strike of 4500,
where the index is trading at
4800, we would say that the
turbo has 300 points of intrinsic
value. In order words, there’s a
cushion of 300 points until the
turbo hits its knock-out barrier
and becomes worthless.
Gap risk is the danger that the
market will move from one level
to another without trading inbe-
tween.
For turbos on stocks, the calcu-
lation is only slightly different:
■ Long turbo = intrinsic value +
fees – dividends.
■ Short turbo = intrinsic value +
dividends.
Let’s consider the Glaxo-
SmithKline long turbo C733,
priced at 118p per turbo at the
time of writing – (remember, prices
can fluctuate enormously with tur-
bos because of their gearing).
■ C733 price = GSK’s market
level – strike level + financing
costs – dividends.
The financing cost here is based
on the strike level of 1100, upon
which interest is charged for the
life of the contract at a rate based
on Libor, an interest rate used by
banks to lend to each other. The
dividends payable on GSK’s
s h a res over the period bring
down the cost of financing. The
net result after adjusting for
The costs are i n t e rest and dividends is that
each turbo costs 118p.
all built into The key thing to remember
about turbo pricing is that the
the price you ‘strike’ or initial level for the
underlying index or share also
pay when you doubles as the knock-out level.
The strike is based on prices over
buy your the week before the turbo is
launched and is structured by
turbo, unlike the options dealers at SocGen to
meet the cost of the margin pro-
with some tection, thereby protecting the
investor from huge losses. It is
instruments also set at a level so that it does-
n’t get knocked out easily if the
where you index does suddenly move.
While turbos are designed so
have charges that investors aren’t exposed to
unlimited losses, there are other
to pay to risks to consider. Turbos are a
derivative product and as such
keep the you’ll have to sign an agre e-
ment called a ‘warrants or
position open derivatives risk warning and
suitability letter’ before you’re
allowed to deal.
In the articles that follow, we’ll
show you the practical uses of
turbos – including detailed exam-
ples of how you can use them to
p rotect yourself against losses
and also how to exploit them to
make much bigger gains than you
could ever make simply from
buying and selling the assets
they’re based on.

ALL TURBOS AT 1 OCTOBER 2008

EPIC CALL OR PUT STRIKE PARITY E X P I RY UNDERLYING ASSET KNOCK-OUT BID AS K SPOT PRICE ON UNDERLYING T
T103.L P 5,500 1,000 19/12/08 FTSE 5,500 0.654 0.657 4,989.80 58
T104.L P 5,600 1,000 19/12/08 FTSE 5,600 0.751 0.754 4,989.80 58
T105.L P 5,700 1,000 19/12/08 FTSE 5,700 0.849 0.852 4,989.80 58
T108.L P 6,500 1,000 19/12/08 GDAXI 6,500 0.708 0.717 5,805.35 58
T109.L P 6,600 1,000 19/12/08 GDAXI 6,600 0.785 0.794 5,805.35 58
T112.L P 4,500 1,000 19/12/08 FCHI 4,500 0.491 0.494 4,039.66 58
T113.L P 4,600 1,000 19/12/08 FCHI 4,600 0.570 0.573 4,039.66 58
C727.L P 2,700 1 12/12/08 AA L. L 2,600 7.759 7.809 1,923.00 53
C728.L P 2,800 1 12/12/08 AA L. L 2,700 8.759 8.809 1,923.00 53
C732.L P 540 1 12/12/08 BP.L 530 0.697 0.717 469.50 53
C733.L C 1,100 1 12/12/08 GSK.L 1,150 1.279 1.339 1,212.50 53
C734.L P 1,320 1 12/12/08 GSK.L 1,280 1.048 1.108 1,212.50 53
C739.L C 105 1 12/12/08 VO D. L 115 0.208 0.228 125.00 53
C741.L P 150 1 12/12/08 VO D. L 140 0.240 0.260 125.00 53
C742.L P 160 1 12/12/08 VO D. L 150 0.340 0.360 125.00 53
Source: SocGen

6 SPECIAL REPORT
007_ICSG_1710_TurbosCompared
Derivatives share many of the same features, but there are also important
differences between them. Dominic Picarda explains why you might want
to employ turbos rather than one of the alternatives
Turbos compared
Y
OU’RE SPOILT FOR
choice when it comes
to trading derivatives
nowadays. The selec-
tion is wide and growing all the
time. Spread betting, contracts
for diff e rence (CFDs), struc-
t u red products, futures and
options are all readily avail-
able. So how do turbos relate
to these other products and
why might you choose them
over the others?
The idea of investing in turbos
– rather than the actual shares
or indices that they’re linked to
– is to obtain gearing. Most of
the other popular derivatives
possess this quality, too.
However, with turbos you can
never lose more than your initial
investment. This is not the case
with spread bets, CFDs or
f u t u res, although it is a feature
of fixed-odds financial betting
and purchased options.
Turbos trade on the London
Stock Exchange, like ordinary
shares, and are bought and sold
through stockbrokers. However,
unlike shares, you don’t have to
pay stamp duty upon purchase.
This makes them particularly
suitable for getting in and out of
markets quickly and at low cost.
You don’t pay stamp duty on
unlisted CFDs either, but your
losses are potentially unlimited
with these products.
Because they trade on a re g u-
lated stock exchange, turbos’
prices are very transpare n t .
21/10/08 16:26 Page 7
You can consult these prices as
easily as you would ordinary
s h a res’. The price of the assets
that they are linked to is also
the real market price. This is
d i ff e rent from spread betting,
w h e re the prices are merely
based on market prices, with
the effect that stop-losses can
be triggered even though the
real market price never hit the
specified level.
Because they are an actual list-
ed investment product, profits
on turbos are subject to capital
gains tax, just like profits on
CFDs, futures and options, and
actual shares. The only pro d-
ucts that avoid capital gains tax
a re spread bets and fixed-odds
financial bets, as these are clas-
sified as wagers rather than
investments.
If you’re looking for a pro d u c t
to hedge actual shares, turbos
make better sense than bets
because profits and losses on
turbos and shares are subject to
the same tax treatment. So, if
you lose on your turbo, you will
be able to offset your shortfall
against profits on your shares
and vice versa, which you
couldn’t do with a bet.
What turbos are really is listed
CFDs – contracts for diff e re n c e
that trade on an investment
exchange. Turbos also come
with inbuilt protection in the
f o rm of an embedded knock-
out barr i e r. When the price of
the underlying asset hits that
TURBOS: SPECIAL REPORT
stop-loss level, the position clos-
KEY es automatically and the
investor loses his investment,
POINTS
■ The idea of
but nothing more. With an
unlisted CFD, it is up to the
investor to specify a stop-loss
and there is an extra cost to pay.
investing in turbos And if the underlying price goes
– rather than a long way through that stop-
actual shares or loss, he is liable for whatever
indices that they’re losses ensue, even if they are
linked to – is to much greater than the amount
obtain gearing he started out with.
Both unlisted CFDs and tur-
■ Turbos trade on bos are mainly used for
the London stock short - t e rm purposes. However,
market and are an unlisted CFD has no auto-
bought and sold matic expiry date, where a s
through stock- turbos generally speaking have
brokers a set life of three months from
the moment they are issued.
■ Because they Unlisted CFDs do offer expo-
trade on a sure to a much broader range of
regulated stock underlying assets, including
exchange, turbos’ many individual equities, both
prices are ve ry domestic and foreign, as well as
transparent to currencies, bonds and com-
modities. Over time, though,
■ You can never the range of turbos on offer is
lose more than likely to expand.
your original Turbos share similarities with
investment another stru c t u red pro d u c t
with turbos called covered warrants. While
these are also issued in the
UK by Société Générale, there
a re key diff e rences between
them. Covered warrants off e r
much greater variety when it
comes to expiry dates. You can
buy covered warrants that
e x p i re 12 months from now, for
example.
SPECIAL REPORT 7
SPECIAL REPORT: TURBOS
Dramatic moves in financial markets are much more common than you’d
believe. David Stevenson shows how you can maintain your portfolio’s value
using turbos
Shelter your assets
with turbos
F
INANCIAL MARKETS
can be a very scary
place, as we all know all
too well after the tur-
moil of the past 18 months.
Over the long run, developed-
market equities have proved a
safe bet. They’ve massively out-
perf o rmed other leading asset
classes, like corporate or govern-
ment bonds and cash deposits.
But superior re t u rns come only
at the cost of higher risk, in this
case: volatility.
The chart (right) depicts
volatility for the Dow Jones
index over two decades. It shows
the range of re t u rns achieved
f rom investing in this benchmark
US index over that period.
Conventional theory suggests
that re t u rns over time will be dis-
tributed in a fairly even pattern ,
with extreme events occurr i n g
only very rare l y.
A study by FinAnalytica, an
investment re s e a rch firm, suggests
that in any real-life distribution of
returns, extreme events are actu-
ally much more common than we
think. The chart shows a worry-
ingly large number of spikes –
d o w n w a rd spikes indicate big
losses. FinAnalytica’s analysis
suggests that extreme events hap-
pen, on average, every 233 days
over the long term, or more than
once a year.
Even if you’re a long-term ,
buy-and-hold investor who feels
he can ride out any near-term
volatility, it pays to take out
8 SPECIAL REPORT
insurance against the downside.
Many people respond to turbu-
lence by simply switching from
shares into cash. However, hav-
ing to sell your shares in this
way is often not an ideal solu-
tion, as it involves incurring
stamp duty, brokers’ commis-
sions and capital gains tax.
A more sophisticated a p p roach
is to use derivative products to
hedge your holdings of shares
and other assets. So, when your
equities, bonds and commodi-
ties lose money, your derivative
hedges make profits, cancelling
each other out. And in a long
period of falling markets – such how much you’re willing to pay
as 2000-03 – you can also make A more for protecting your portfolio.
positive returns from speculat- P e rhaps you feel the market is at
ing on market declines. sophisticated risk of a 20 per cent decline,
which would reduce the value of
A BEAR MARKET approach is your £5,000 equity holding to
HEDGE FUND £4,000. In these circumstances,
To understand how you could to use you might well be willing to pay
hedge your portfolio, we’ll take a round 5 per cent of the value of
one simple example – a bearish derivative your UK portfolio to insure
strategy on the FTSE 100. against such a decline.
Say the index is trading at 4900, products to Buying a short turbo could
having fallen from a peak of 6750 provide exactly that sort of
in 2007. However, you may hedge your insurance policy. At the time of
believe that it is due another writing, there are three turbo
s e v e re correction. You don’t holdings of shorts on the FTSE 100. These
know where the bottom will are the T103 with a strike price
occur, but you think it’s a long shares and of 5500, the T104 with a strike
way from current levels. You hold price of 5600 and the T105 with
a portfolio of shares and funds other assets a strike price of 5700 (see table).
worth £10,000 – £5,000 of which At the beginning of October,
is exposed to the FTSE 100 – with the underlying index – the FTSE
the rest in bonds, cash and 100 – was trading at 4989. You
volatile emerging market equities. decide to buy the ‘safest’ of the
The first step is to work out three turbo shorts – the one with
 TURBOS: SPECIAL REPORT

the knock-out level that is far-

thest away from the current
price of the index. The T105
won’t get knocked out unless the
FTSE rises by more than 700
points or 14 per cent.
You’ve decided to pay £250 – or
5 per cent of the value of your UK
equity holding – for this turbo as
insurance. The cost per turbo is
84.9p. Your £250 ‘insurance fund’
buys you 239 long turbos, less a
notional £10 trading cost. Over
the next three months, the FTSE
100 moves sharply downwards as
you expected, and hits 4500 by
the middle of December – a fall of
489 points. These turbos would
i n c rease in value to £1.36, a 60 per
cent gain from a 10 per cent fall in
the underlying index.
Turbos can also be used to hedge
against losses on particular equity
positions in a portfolio. This time,
let’s assume you have a portfolio
with £10,000 invested in remaining £9,000 of Vodafone 10 per cent but it might not hap-
Vodafone. At the end of s h a res would now be worth pen until one day after the expiry
September, Vodafone’s share price £7,416. So, your overall loss – the of your turbo – making your hedge
is 121p and you have 8,210 shares. drop in the value of your remain- worthless. Are you, therefore, will-
But you think that the share price ing shares plus the profit on your ing to keep hedging your portfolio
will fall and you want to buy some turbo – is only £900 on £10,000, by rolling over your position with
p rotection. In this case, you opt to leaving you with positions worth new turbos, incurring the costs
switch 10 per cent of your holdings £9,086. Had you hung onto the that involves?
– £1,000 – into a short turbo, leav- £10,000 shares and not bothered You should also scrutinise the
ing you with £9,000-worth of with the turbo, your paper posi- knock-out level. Volatility in the
Vodafone shares. tion would be worth just £8,264. market could see the FTSE spike
By the end of October, the Like any options-based hedging above 5500, possibly even to
s h a res do, indeed, fall to 100p – a strategy, using turbos requires you 5700 over a one-week period,
fall of just over 17 per cent. The to think very carefully about the knocking out your turbo. After
short turbo on this particular level of risk that you are comfort- that, though, the FTSE could still
s h a re would have originally cost able with in a portfolio. For finish down at 4500 in three
you 29.8p. But, by the end of example, how much are you will- months’ time as you expected, but
October, this turbo would be ing to invest in hedging your you’ve made no money at all.
priced at 50p, an increase of just underlying holdings? You also It is also important to check the
under 68 per cent – or some four have to consider the timescales gearing on the turbo. If you are
times the decrease in the underly- involved. Three months may seeking potentially super-sized
ing shares. Thus your £1,000 sound like a long time, but you returns, look for the maximum
insurance policy – £990 after might be wrong about how long possible gearing. If you want to
dealing costs – would now be the market takes to go the way you make smaller overall returns with
w o rth £1,670, making you a expect, even if you are right about more safety, look for lower gearing
profit of £670. By contrast, your its direction. The FTSE might drop and more distant knock-outs.

CURRENT TURBO SHORTS COMPARED

EPIC CALL OR PUT STRIKE PA R I TY E X P I RY UNDERLYING KNOCK OUT BID AS K SPOT PRICE ON UNDERLYING T
T103.L P 5,500 1,000 19/12/08 .FTSE 5,500 0.654 0.657 4,989.80 58
T104.L P 5,600 1,000 19/12/08 .FTSE 5,600 0.751 0.754 4,989.80 58
T105.L P 5,700 1,000 19/12/08 .FTSE 5,700 0.849 0.852 4,989.80 58

SPECIAL REPORT 9
SPECIAL REPORT: TURBOS
Turbos can be used to produce powerful returns that complement the performance
of your mainstream shares and bonds. David Stevenson and Dominic Picarda
show how you can make this approach work for you
Super-charged
returns with turbos
W
HETHER YOU
th i n k the markets
a re heading up or
down, turbos offer
a great way to earn super-charged
returns. This is because they are a
g e a red product – their prices
experience exaggerated moves
when the price of the assets
12 SPECIAL REPORT
t h e y ’ re linked to changes. So, if
an index moves up or down by 1
per cent, a turbo based on that
index price can move up or down
20 per cent.
It’s easy to see how this feature
could be useful. The ability to
make massive re t u rns off small
price moves could seriously
i n c rease your wealth, if done
properly. Say you’ve a strong
bullish view on a particular equi-
ty or index. Simply buying the
s h a res or an index-tracker will
p robably only earn you pedestri-
an returns over a three-month
period or less. But with turbos,
you can turn your best ideas into
profit much more convincingly.
We show in another article how
you can use stock and index tur-
bos to protect your assets – see
pages 8-9. But how about using
index turbos alongside your exist-
ing holdings in order to add
upside potential, rather than to
limit downside potential? Let’s
say you want to take a bullish
position on the direction of the
market, while maintaining a core
defensive stance.
Here’s how this particular strat-
egy might work. Following a
sizeable drop, you think that the
market is due for a big rebound.
Rather than throw caution to the
wind entire l y, however, you could
keep a large part of your total
portfolio’s value in safe assets,
such as government bonds or
defensive utility stocks. At the
same time, you also take a small
speculative position on the FTSE
100 going up sharply in value,
committing, say, between 2 per
cent and 4 per cent of your over-
all capital.
Now let’s say that you have a
portfolio worth £100,000 and
that you decide to invest 2 per
cent (£2,000) in a FTSE 100
index turbo with five times gear-
ing. If the FTSE 100 index then
rises by 5 per cent in a single day
– perfectly possible in the volatile
markets of today – your turbo
index could rise by 50 per cent in
value, leaving your position
worth £3,000, and generating a
profit of £1,000. In terms of your
overall portfolio, you’d have
added 1 per cent to your overall
re t u rns. That may not sound
much, but, given that long-term
buy-and-hold investing typically
generates returns of 9 per cent a
year, 1 per cent in a day is not to

be sniffed at. Of course, the
potential downside could be
equally substantial. If the mar-
ket moves in the opposite
direction to which you expect-
ed, you could end up losing the
£2,000 you paid for your turbo.
However, you can never lose
any more than that initial out-
lay, unlike with many other
derivatives where you’re on the
hook for potentially enorm o u s
losses. Even if that happens in
this example, though, you’ve
still got the remaining £98,000
of your portfolio in safe assets,
so your overall drawdown risk
is very low.
It is also worth remembering
that you’re not doomed to lose
your entire turbo investment if
things don’t go as planned. Prior
to the turbo’s expiry, there’s
always the possibility of selling
your position at a loss. For exam-
ple, you have a short turbo on the
FTSE 100 with a knock-out barr i-
er at 4500. The market rises
sharply to within 200 points of
this barrier. You revise your pre v i-
ously bearish view and decide to
get out now. You will not get back
all of what you paid, but some-
thing is better than nothing.
Knowing when to admit you’re
w rong is an essential skill if you’re
to become a successful trader.
Its previous strategy of trying to
exploit major rallies works out
for you a few times over a year,
you could easily generate a re t u rn
of 3 per cent or 4 per cent a year
over and above the re t u rn you
earn on your core, defensive
assets. In essence, you’re practis-
ing a classic ‘absolute returns’
strategy, as practised by hedge-
fund investors every w h e re. To
make this strategy work, you’ve
TURBOS: SPECIAL REPORT
got to be very smart – or lucky – moment of purchase, GSK’s
when it comes to timing. Moving share price was 1,188p, where a s
in quickly, riding the best of the Turbos can the turbo at that point cost
move and getting out sharpish is 108p. A month or so later, the
crucial. The danger of such a also be used GSK share price has moved up
strategy is that you get caught by 5 per cent to 1,250p a share .
holding geared long or short posi- to make In response to that gain in the
tions for too much time in a underlying asset, the long GSK
pronounced bear or bull market. money from turbo shoots up from 108p to
At the time of writing, one fair- 170p – a 57 per cent increase in
ly significant obstacle to price the share price, or more than 11
pursuing this kind of strategy is times the increase in actual GSK
that there are no long index tur- movements shares.
bos available. Market volatility Be aware, however, that this
and negative sentiment has in individual highly geared upside comes
reached such extreme levels that with the usual risks attached. If
knock-out barriers on all pre v i- shares the shares move in the wro n g
ously existing products have direction, you could lose all
been reached. However, this is your money. The knock-out
likely to prove only a temporary barrier for this turbo is set at
situation. As volatility subsides, 1100, which means that, if the
SG should be able to issue a fre s h shares had moved down by
batch of turbos. m o re than 15 per cent, your ini-
Turbos can also be used to tial investment would have been
make money from price move- wiped out.
ments in individual shares. Let’s
look at a simple example of this.
Assume that you accept the
defensive logic of buying into
big pharmaceutical shares as a
remedy to a long-term bear mar-
ket. Established drug companies
such as GlaxoSmithKline and
AstraZeneca enjoy more stable
sales and profits growth than
firms in many other industries,
because medicines are not
something that people can do
without, even in hard econom-
ic times.
Based on this view, you decide
that, over the next
t h ree months, GlaxoSmithKline’s
(GSK) shares a re likely to enjoy a
bounce. Rather than buying the
actual shares in order to profit
f rom this anticipated recovery,
you invest in the long GSK
turbo, called C733. At the
SPECIAL REPORT 13
SPECIAL REPORT: TURBOS
The gearing on turbos make them great for transforming a few hours’ price
movement into big profits, but without the extreme risk of most other day
trading, says John Hughman
The turbo route to
day-trading profits
W
ARRANTS HAVE
always been a good
way for investors
to take low-risk
bullish or bearish positions on a
medium-term view. At the same
time, contracts for diff e re n c e
(CFDs) and spread betting offer
the opportunity for investors to
generate large returns from small
stakes. Turbos – previously known
as ‘listed CFDs’ or ‘knock-out
warrants’ – now provide the best
of both worlds.
“They’re perfect for day trad-
ing,” says Alexandre Chessé, head
of UK listed products distribution
at Société Générale’s corporate &
investment banking division,
which is the main issuer of turbos.
“The high gearing works well over
a short-term horizon.”
Turbos are a ‘delta-one’ pro d-
uct. This means that movements
in the price of the warrant move
in parity with movements in the
price of the underlying asset.
But because they are priced
much lower than the underlying
asset, small absolute price
movements translate into higher
percentage changes.
Traders looking to get in and
out of the market quickly need
tools that allow them to magni-
fy the relatively small percentage
movements of major indices or
equities into bigger percentage
returns. The average daily
change of the FTSE 100 is less
than 1 per cent, which makes it
hard to make significant profits
14 SPECIAL REPORT
without using gearing. Of
course, in late September and
early October, average daily
moves became much bigger,
thanks to some giant one-day
swings of more than 8 per cent.
Turbos have low sensitivity to
volatility moves. Again, this is
good news for day traders, as it
means you don’t have to pay
more for turbos based on the
volatility of the market, in direct
contrast to traded options,
which get more expensive the
higher the volatility on the
underlying asset becomes.
But why not use spread betting
to capitalise on small daily
movements? After all, a 1 per
cent move in the FTSE 100 is
equal to 50 points and, at £100
a point, that could rack up a
hefty, tax-free profit in a very
short timeframe. And a £100-a-
point CFD against British
Airways on 6 October would
have raked in as much as £2,000
as the shares slumped on fund-
ing worries.
The answer is that increased
volatility also increases the risk
of a trade going against you, and
again turbos offer traders signif-
icant risk advantages compared
with spread betting or unlisted
CFDs. Trading with CFDs or
spread bets is essentially an
open-ended trade that can lead
to almost unlimited losses.
Those profits could easily
become losses if, as has been the
case in recent weeks, unexpected
news sends the market sharply
Since turbos in the opposite direction.
Turbos offer a degree of pro-
are listed on tection not available elsewhere.
True, you’ll have to forego some
the London of the leverage, but that’s a small
price to pay for the peace of
Stock mind turbos give you. If the
market moves against you, the
Exchange, most you can ever lose on a
turbo is your original outlay.
they are also Because turbos have an in-built
stop-loss – called the knock-out
very easy to barrier – investors will never
receive the dreaded margin call,
trade. when the broker calls up
demanding more money in order
“They’re a to keep your position open.
Of course, you can buy guaran-
very straight- teed stop-losses with spread bets
and standard CFDs, but this is
forward an expensive optional extra.
Since turbos are listed on the
product,” London Stock Exchange, they are
also very easy to trade. “They’re
a very straightforw a rd product,”
says Mr Chessé, “They benefit
from excellent liquidity and a
tight bid-offer spread.” For day
traders, this means the ability to
move in and out of positions very
quickly. And almost all leading
b rokers offer the ability to trade
in turbos.
Turbos are also cheap to trade. A
flat fee of around £10 to £25 is
typically payable on a margin pay-
ment of £10,000, and there’s no
minimum contract size which
means day traders can work
through a number of bite-sized
trades. The tight spread won’t eat

up trading gains on small moves,
either. Two-point spreads is about
as good as you’ll get anywhere
and, unlike spread bets, this
remains steady throughout the life
of the contract.
As you’d expect, turbos are avail-
able on a fairly wide range of
leading equities and indices. As
many day traders now rely on
technical analysis – exploiting
trends and reversals on the charts –
to inform their decisions, trading
with turbos allows them to follow
exactly the same tried-and-tested
a p p roach as they would when
trading with any other instrument.
Let’s take a look at two ideas for
day-trading with turbos, both
using technical analysis. Each of
the approaches offers a different
level of risk, and therefore should
suit most day-trading approaches.
HIGH-RISK TRADE
Buy a long turbo with a price that’s
close to its knock-out barrier. The
key differentiating feature of tur-
bos is their ‘knock out’ feature –
essentially, an in-built stop-loss.
And while day-traders will need to
tread carefully to ensure their posi-
tions aren’t ‘knocked out’ very
quickly in turbulent markets, it’s
also a feature that can count in
their favour.
The closer turbos fall towards
their barrier level, the lower the
price of the turbo and – with the
‘delta one’ characteristics – the
higher the gearing they offer. A
good example would be the T115,
which has a knock-out barrier of
4500, only marginally below the
price at the time of writing of
4640. A look at historic charts
suggests that there may be a frag-
ile level of support just above the
knock-out level, at 4550.
A trader may decide that, hav-
ing bounced off this level, the
market may continue rising. He
therefore buys the turbo at 20.2p.
A 1 per cent gain on the FTSE
would equate to a 4.6p gain on
the turbo – a whopping 23 per
cent gain on the price paid – mak-
ing it an advantageous trade for
those looking to risk very small
TURBOS: SPECIAL REPORT
amounts of initial outlay. might even choose the T105 short
In fact, in the five minutes I News of the turbo, which has a knock-out bar-
took writing out this example, rier at 5700, further away from the
news of the US Federal Reserv e ’s US Federal level of the FTSE today. The price
decision to buy up commerc i a l of the turbo is correspondingly
paper sent the FTSE shooting Reserve’s higher, which means that every
u p w a rds, and the value of this downward move in the FTSE
contract increased to 30.7p, giv- decision to relates to a 5 per cent return.
ing a 53 per cent re t u rn . Both trades would have been
However, the risk is that another buy up out-of-the-money on the Fed
calamitous day in the markets announcement, but neither would
could wipe out this position quick- commercial have been knocked out. But if we
ly. T115 turbo fell to within 15 assume that this marks the start of
points of the knock-out price on paper sent a short countertrend rally, it could
7 October – a close shave indeed. p resent an opportunity at what
the FTSE looks like resistance levels at 5300,
MEDIUM-RISK TRADES 5450 and 5650. If the market fails
A slightly less risky trade would be shooting to breach these levels, there could
the T114, priced at 38.5p with a be subsequent sharp falls which,
strike of 4300. The lower risk and upwards, and given the proximity to the knock-
lower gearing means a 1 per cent out barrier, could be exploited
upward movement would ‘only’ the value of with much higher gearing.
translate into a 12 per cent gain – Obviously, trying to predict the
still not bad for a day’s work and this contract peak and buying on the way up
with little chance of being knocked increases the risk of being
out altogether. increased to knocked out, so it makes more
sense to trade on the downward
LOWER-RISK TRADES 30.7p, giving momentum if the market re v e r s-
Place a limit order to buy a short es. This trade could be automated
turbo in a falling market. a 53 per cent using a conditional limit order,
Traders who think that markets which would buy at a set level on
will fall through a level of sup- return the way down after hitting a
port – rather than bounce off it – higher target.
can take out an option to buy a
put turbo once the markets
break below a specified level.
This is slightly less risky than
trying to predict a bounce and,
in fact, traders can set their own
level of risk by deciding how
much daylight they want to see
between the purchase price and
the strike/knockout level. Again,
the greater the distance between
the purchase price and the
knockout, the lower the gearing
the trade offers.
Let’s take a look at two current
s h o rt turbos to illustrate this. The
T103 – with a knock-out barrier
of 5500 – can be bought for 81.3p
(17 per cent above the FTSE 100’s
c u rrent level) and is unlikely to be
knocked out in the short term .
But that reduced risk comes at a
cost – a one percentage point
move in the FTSE only re p resents
a 6 per cent move in the turbo.
A slightly less risk-averse investor
SPECIAL REPORT 15
SPECIAL REPORT: TURBOS
The best way to understand what turbos can do for you is to see how a successful
trader uses them. Our widely followed columnist, Simon Thompson, reveals how he
uses these instruments to generate market-beating returns.
Trade turbos like a pro
T
HE MOST IMPOR-
t a n t lesson I have
learned in the past 20
years is how to play the
percentages. Your view of the
market may be right, but unless
you’ve got the right instrument
to exploit that view, you won’t
make money. This is especially
t rue when you use leveraged
products such as contracts for
difference (CFDs), turbos and
covered warrants, as these
instruments exaggerate your
gains and losses.
Before entering any trade, I
make sure that I am giving
myself enough time for other
investors to come around to my
way of thinking. Therefore, it is
essential that the product I use to
trade has at least the same time
horizon as I need for my view on
the markets to pan out.
Secondly, I never want to get
stopped out on a trade, so I
always choose a product where I
will be around to fight another
day even if the position is going
against me in the short term.
This is especially important in
volatile markets.
For instance, consider a trader
who was short of the FTSE 100
on Thursday 18 September
when the market closed at
4880. One day later, the index
re c o rded its biggest daily gain
e v e r, closing a massive 431
points higher at 5311 and hit-
ting an intra-day high of 5351,
driven by news of a ban on the
16 SPECIAL REPORT
short-selling of financial share s
and a US government bailout
plan for the beleaguered bank-
ing sector.
With some spread-betting firm s
and CFD providers, a 10 per cent
rise in the index from Thursday’s
close to Friday’s intra-day high
would have been enough to wipe
out the margin the trader had put
up on the short position and
would have meant the short
trade would have been automat-
ically closed out. But just 12 days
later the FTSE 100 had fallen
back to 4671, so the trader
would not have profited even
though he was ultimately right in
his bearish view. This is exactly
why I am so keen on using cov-
ered warrants and turbos to
trade the indices.
MY BEST TRADE OF 2008:
FTSE 250 SHORT-LISTED
TURBO TRADE
My best trade this year was a
short trade on the mid-
cap index (INVESTO R S CHRONICLE,
Bad tidings, 7 January 2008)
through a FTSE 250 short - l i s t e d
turbo, C433. I was very bearish
on the outlook for UK equities,
given the impending economic
slowdown in this country and
the fallout from the intern a t i o n-
al financial crisis. To capitalise
on my view, I decided to short
the FTSE 250, an index stuff e d
full of medium-sized companies
that are focused on economical-
ly sensitive and consumer-facing
industries, such as pro p e rt y,
Before housebuilding, financials, banks
and stockbroking.
entering any I chose the short-listed turbo,
C433, because it had a knock-
trade, I make out barrier of 12550 and had six
months to expiry on 11 July
sure that I am 2008. There f o re, I was giving
myself ample time for the
giving myself d i re economic and corporate
news to emerge and the savage
enough time de-rating of FTSE 250 shares
to take effect. Moreover, with
for other the FTSE 250 trading at 10200
in January I felt there was no
investors to chance of being stopped out
of this instrument if the
come around market moved against me in
the near term.
to my way of Remember, the FTSE 250 had
soared to an all-time high of
thinking 12282 in May 2007 on the back
of a mergers-and-acquisitions
frenzy. However, the credit crunch
led to a dramatic fall in takeover
activity, which pulled the rug fro m
under share-price valuations
among mid-cap firms. As I saw it,
there was no way the index was
going to revisit those record highs
and hence no way I would ever get
stopped out of my short turbo
position.
In addition, the turbo in
question offered good value
and traded on a relatively tight
two-point bid offer spread. I
paid 2,584p per turbo, which
equated to 2584 points on the
FTSE 250, in early January.
H o w e v e r, as the turbo had
2350 points of intrinsic value –

calculated as the diff e re n c e
between the guaranteed stop-
loss of 12550 and the market
price of 10200 – I was only pay-
ing 234 points, or 234p per
turbo, for the right to short the
index over the following six
months. And, as I was short i n g
the index, I had to pay divi-
dends rather than receive them.
Still, that was money well
spent, because when the turbo
e x p i red in mid-July 2008, the
FTSE 250 had plunged by 18
per cent to 8339 and my turbos
had increased by 63 per cent in
value to 4,211p. The difference
between the percentage fall in
the index and the gain on
the turbo reflects the leverage of
the product.
PAIR-TRADING TURBOS
In bear markets, the correla-
tion between global stock
markets rises significantly. At
one point during the 2000-03
bear market, the US and UK
equity markets were moving in
step over 90 per cent of the
time. So, on the face of it, try-
ing to pair trade the returns
between international stock
markets is hardly worthwhile.
But that would be a mistake,
because we can exploit the dif-
f e rent sector weightings in
international indices.
For instance, the blue-chip
FTSE 100 has a strong bias
t o w a rds re s o u rce companies,
with oil & gas and mining firm s
making up 35 per cent of the
index. By contrast, the Dax 30 is
m o re heavily weighted toward s
general industrials, automobile
m a n u f a c t u rers and chemical
companies, which account for
42.5 per cent of the index. The
financial sector – banks, insurers
and asset managers – has a simi-
lar weighting of around 20 per
cent in both indices.
As a result of the different
make-up of the indices, there is
scope to pair trade the two
indices even in bear markets.
Let’s assume global equity mar-
kets stage a classic counter-trend
bear market rally in the fourth
quarter, but that you also
expect the economically sensi-
tive general industrial, auto-
mobile and chemical sectors to
underperform the savagely de-
rated, high-beta resources
sector. One way of profiting
f rom this view is by simultane-
ously going long of the FTSE
100 and going short of the Dax.
Both trades can be executed
t h rough listed turbos.
PAIR TRADE: LONG FTSE
100-S H O RT DAX 30
To play the long side, the FTSE
100 long turbo, T114, has a
knock-out barr i e r of 4300,
expires on 19 December 2008
and has a parity of 1,000:1.
With the index at 5000, the
turbo is priced at 86p, so you
need to buy 1,000 of these
instruments at a cost of £860
(equating to 860 points on the
index) to give yourself expo-
s u re to one contract on the
FTSE 100. In this instance, a 1
per cent rise in the FTSE 100
would mean that your holding
of 1,000 long listed turbos,
T114, would gain around £50.
On the short side, the Dax 30
turbo, T109, has a stop-loss of
6600, expires on 19 December
2008 and has a parity of
1,000:1. With the index at
5800, the turbos are trading at
79p so you need to buy 1,000
of these instruments at a cost
of £790 to give yourself expo-
s u re to one contract on the
Dax 30. The Dax is denomi-
nated in euros, and with
sterling worth E1.26, this
means that the £790 equates to
around E995 or the equivalent
of 995 points on the Dax. In
this instance, a 1 per cent rise
in the Dax 30 (or 58 points)
means your holding of 1,000
s h o rt turbos, T109, would fall
by around £46. The calcula-
tion is: 58 points fall in the
index divided by the exchange
rate of E1.26.
If you are right and markets
rally in the coming months, but
TURBOS: SPECIAL REPORT
the FTSE 100 outperforms the
On the face of Dax, then the profit on the FTSE
100 long turbos will offset the
it, trying to loss on the short Dax turbo,
leaving you with a net profit.
pair trade the Moreover, if you are wrong, and
both indices fall, then the profit
returns on the short Dax trade will help
offset the loss on the FTSE 100
between long trade.
international USING TURBOS AS
PORTFOLIO INSURANCE
stock markets As we saw in the article on
pages 8-9, turbos are also a
is hardly g reat way to hedge portfolios.
For instance, imagine you have
worthwhile. a £100,000 share portfolio that
has built up some decent long-
But that would t e rm paper profits, but you are
w o rried the market could fall in
be a mistake, the short term. So, to avoid see-
ing your paper gains evaporate,
because we you could take out a FTSE 100
s h o rt-listed turbo to hedge
can exploit against the downside risk, for
example T105, which has a
the different knock-out barrier of 5700,
e x p i res on 19 December 2008
sector and has a parity of 1,000:1.
With the index at 5000, these
weightings in s h o rt turbos are priced at
83.9p, so you would need to
international buy 1,000 of these instruments
at a cost of £839 (equating to
indices 839 points on the index) to give
yourself exposure to one con-
tract on the FTSE 100.
T h e re f o re, for every 1 per cent
fall in the FTSE 100 – namely
50 points – the value of your
holding of 1,000 turbos would
i n c rease by £50.
However, if your portfolio
moves in line with the market,
then every 1 per cent fall would
wipe £1,000 off the value of
your £100,000 portfolio. So, to
avoid suffering this loss, you
could hedge this risk by buying
20,000 turbos – at a cost of
£16,780. Remember, 1,000 of
these short listed turbos would
gain £50 if the market fell by 1
per cent, so 20,000 turbos
would rise in value by £1,000.
And this £1,000 profit on the
turbos would exactly offset the
loss on your share portfolio.
SPECIAL REPORT 17
 SPONSOR’S PROFILE

Société Générale Corporate

Investment Banking
A global leader in structured products
The structured products engineering, trading and sales teams
operate at the heart of SG CIB’s Equity Derivatives platform,
renowned as the worldwide leader in this market.
Awarded “Equity Derivatives House of the Year” four times For more information on Turbos or our other Listed
by IFR, Risk Magazine, the Banker and Euromoney, SG CIB Products contact us:
has reinforced its position as a:
■ Worldwide leader in Equity Derivatives Freephone: 0800 328 1199
■ Worldwide leader in Warrants
■ Key player on the European ETFs market Address:
Société Générale
A market leader in the UK since sector launch (2004), where Exchange House
more than £1 billion has been traded. SG has applied their Primrose St
knowledge of equity derivatives to launch SGTurbos, the London EC2A 2HT
UK's first Turbos on the London Stock Exchange. Email: listedproducts@sgcib.com

Société Générale is one of the largest financial services groups in the eurozone. The Group operates in 82 countries and employs
151,000 people worldwide in three key businesses:
Retail Banking & Financial Services: Société Générale serves 27 million individual customers worldwide offering a wide-range of
products and services from current account services to more sophisticated products.
Global Investment Management & Services: Société Générale Group is the 4th largest bank in the euro zone by assets under man-
agement, with EUR 381 billion (end June 2008), and the 3rd largest by assets under custody (EUR 2,733 billion, end June 2008).
Corporate & Investment Banking: Tailoring solutions in terms of capital raising, financing, risk management and investment, SG
CIB combines expertise, innovation and advisory skills coupled with quality of execution to both issuer and investor clients across
debt and equity.
Société Générale Group annual reports can be accessed on www.investor.socgen.com.