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Ben thompson

Building a fixed risk trading strategy


The single most important factor when deciding your trading strategy is your market view; what do you expect to happen? Once you have decided that, the process of selecting a product is almost entirely driven by your appetite for risk, and how sophisticated you want to get with your product. This may all sound very simple but with 85 different underlying markets and 688 products split across our range of Covered Warrants, Turbos and Super10s, its not always easy to steer your way through this vast world of choice. In this article we hope to break down that choice and make it easier for you to find a product that reflects your view and risk appetite.
WHiCH tYPe of ProDUCt is for me?
so, you have decided that you want the chance for proportionally higher returns, and realise that to get this, you have to accept the possibility of larger losses too. this brings you to our range of Leveraged Products, but how do you choose between Covered Warrants, turbos and super10s? one way is to look at the products in terms of complexity vs the power of gearing.

take a simPLe vieW WitH sUPer10s

super10s are by far the simplest of the three products. they are suitable for investors with a 3-6 month view on the general direction of an underlying asset. the payout is not dependent on the actual performance of the underlying; it just has to avoid a pre-determined Barrier Level throughout the whole period of the investment. Choosing which one is right for you is just a matter of deciding whether the underlying asset will stay high, stay low or stay within a range. regardless of which type you choose, the potential payout at expiry is always 10 per unit so you know exactly what you stand to gain. to get 10 per unit back at the end of the 3-6 month investment term, the underlying asset simply has to avoid a Barrier Level, or a pair of Barrier Levels in the case of range super10s. if it touches a Barrier Level at any point, the product knocks out and you lose your initial investment immediately. the initial range of super10s are based on gold or the ftse 100 index. there are a number of stay Highs, stay Lows and range products on each underlying, all with different Barrier Levels. the closer the underlying asset is to a Barrier Level, the cheaper the product, and therefore the higher the return. However, as you might expect, the potential return also corresponds to the potential risk, so you have to be comfortable that the underlying will never hit this level. Your choice will depend on how much risk you want to take.

leVel of gearing

Covered Warrants




Building a fixed risk trading strategy

Ben thompson

Leverage a rising or faLLing market WitH tUrBos

Unlike super10s where the return is fixed, turbos can generate an unlimited payout based on how far the underlying has moved in relation to a pre-determined strike Price. there are two types to choose from; Long turbos which will generate a payout based on how far the underlying has risen above the strike Price, and short turbos which will generate a payout based on how far the underlying has fallen below the strike Price. so if you expect the underlying to move a long way, and you dont want any limit to the amount that you could potentially earn, you may consider turbos a good choice. turbos benefit from gearing which essentially means that you can buy

exposure to an underlying asset for a fraction of the cost of buying the asset directly. for example, a turbo may be linked to aBC Company which is currently trading at a price of 1.00. the price of the turbo may be just 20p, but it will benefit from virtually the full movement of aBC Companys share price. so for example, if aBC Company increases in value by 10p, so too will the turbo. in this instance a 10% increase in the value of aBC Company has translated into a 50% rise in the value of the turbo. this is generally referred to as a gearing level of 5. there are two important downsides to mention here. firstly, you do not actually own shares in aBC Company. secondly, gearing works against you too. should aBC Company fall 10%, the turbo would lose 50% of its value. importantly, thanks to the knock out level, you can never lose more than

you invested because the turbo simply expires with no value if the knock out level is ever touched. When investing in higher value underlyings such as an index like the ftse 100, it is not practical to provide exposure to the full value of the index because the turbo would be too expensive. instead, the turbo scales down its exposure by a figure known as Parity. in the case of indices, the Parity figure is typically 1000, which means that you would need to buy 1000 units of the turbo to gain exposure to one unit of the index. in practical terms, it means that we have to divide any difference between the strike Price and Underlying asset price by 1000 in order to arrive at the profit or loss for the product.

PUtting it into PraCtiCe

so, everything starts with your market view; which underlying are you interested in, what do you expect to happen, and how long do you think it will take? for instance, you may anticipate that the ftse 100 index is going to recover to a level of 5,600 by December. from this you have an underlying, an expected outcome (rise in the ftse), a time period and a target level of 5,600. Looking at the range of turbos available on the 6th october, there are three Long ftse turbos that expire on the 16th December and could suit this view. as you can see from the table on the next page, the closer the knock out level is to the underlying asset level, the cheaper the turbo, and the higher the potential payout. for example, t367 has a strike Level of 4,500 and costs 0.7574 based on the ftse 100 index level of 5,202.81*. if you are correct and the ftse 100 index closes at 5,600 on the 16th December, a rise of 7.63%, t367 will generate a payout of 1.10, a rise of 45.23%. Because these are Long turbos, we calculate the payout by subtracting the strike Price (4,500) from the Underlying index Level (5,600) and dividing it by Parity (1000): 5,600 4,500 / 1000 = 1.10. We can compare that to t369 which has a strike Price of 4,800. this is a much riskier product because the ftse 100 index only has to fall 7.74% before it hits the knock out level and the product expires worthless. However, investors are compensated for this additional risk by a much lower price. With the ftse 100 index trading at 5,202.81, each unit of t369 is 0.4840, substantially lower than t367. as such, the potential payout on t369 based on our example where the ftse 100 index closes at 5,600 on the 16th December is 0.80 (5,600 4,800 / 1000 = 0.800), a profit of 0.3160 (0.800 0.4840 = 0.3160) per unit or 65.29%. the key point here is that investors can choose a turbo based on their individual risk / reward profile. You take more risk and you could make bigger returns, but you also have a much higher chance of losing your money too.

Underlying ftse 100 ftse 100 ftse 100

Type Long Long Long

Strike 4,500 4,600 4,800

KO 4,500 4,600 4,800

Expiry 16 Dec 11 16 Dec 11 16 Dec 11

Parity 1000 1000 1000

EPIC t367 t368 t369

ISIN CWn8138J7474 CWn8138J7391 CWn8138J7219

*as of 6th october, 2011

Ben thompson

Building a fixed risk trading strategy

iLLUstrative retUrns at exPirY BaseD on an inDex LeveL of 5,600 ProviDeD tHe ko Barrier is not toUCHeD FTSE 100 Index Level 4500 4600 4700 4800 4900 5000 5100 5200 5300 5400 5500 5600 Payout Per Turbo () T367 ko 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.10 T368 ko ko 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 T369 ko ko
% prot / loss

PaYoUt iLLUstration for tHe foUr tUrBos

80 60 40 20 0 -20 -40 -60 -80 4500 4600 4700 4800 4900 5000 5100 5200 5300 5400 5500 5600 -100 T367 T368 T369

ko ko 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80

Index Level

this is not a recommendation; it is for illustrative purposes only. Prices are indicative only. source:, 6th october 2011. reference price 5,202.81 *as of the 6th october 2011

getting PoWerfUL WitH CovereD Warrants

Covered Warrants are similar to turbos in that they provide geared exposure to an underlying asset over a fixed investment term. there are two types; Call Covered Warrants which provide a leveraged payout at expiry based on how far the Underlying asset is above the strike Price, and Put Covered Warrants which provide a leveraged payout at expiry based on how far the Underlying asset is below the strike Price. the risk profile is the same too; your entire invested capital is at risk but you cannot lose more than you invest. the big difference is how the prices move prior to expiry. this is more complicated for Covered Warrants but the investor who takes the time to understand Covered Warrants can be rewarded with higher levels of gearing, allowing them to take a more aggressive position in the markets. its important to stress though that more gearing means more risk, and a greater chance of losing your initial investment. another key difference is that Covered Warrants do not have a knock out Barrier Level. this means that should the underlying asset fall considerably, Covered Warrant investors are still in the market, providing the opportunity for the underlying asset to recover, and retaining some value prior to expiry.

UnDerstanDing CovereD Warrant PriCes

Covered Warrants are typically used to execute a very short-term view of just 3 days to 3 months. However, some investors choose to hold them until the strike Date when the Covered Warrant expires and automatically pays out any return that is due to your stock Broker account. the calculations for Covered Warrant returns at expiry are the same as a turbo: Call Covered Warrant: (Underlying Asset Price Strike Price) / Parity Put Covered Warrant: (Strike Price Underlying Asset Price) / Parity However, prior to expiry a Covered Warrants price will move according to three main variables; the underlying asset price, time to expiry and implied volatility. the Underlying asset Price is perhaps the easiest to understand and the effects are summarised below:

UNDERLYING PRICE Underlying prince increases Underlying price decreases

CALL PRICE increases Decreases

PUT PRICE Decreases increases

Building a fixed risk trading strategy

Ben thompson

applying this to your trading strategy is relatively simple. if you think that the underlying asset is going to rise, you should be looking at the range of Call Covered Warrants. However, if your view is more Bearish, take a look at the range of Put Covered Warrants. there are generally a number of Covered Warrants for each underlying asset, and you will need to choose one with a strike Price that suits your view as to how far the underlying asset will move. for some Covered Warrants the underlying asset price is already above the strike Price for a Call Warrant, or below the strike Price for a Put Warrant, these are said to be in the money because if they expired at that point, you would receive a payout. the amount by which the Covered Warrant is in the money is said to be its intrinsic value.

more experienced investors who are prepared to take more risk may look for Covered Warrants where the Underlying asset is the same or below the strike Price in the case of a Call Warrant, or above the strike Price in the case of a Put Warrant. We call these at the money and out of the money Covered Warrants. typically, the further the Covered Warrant is out of the money, the cheaper the Warrant and the higher the level of gearing. However, as we saw earlier, higher gearing means higher risk and an increased chance of losing your money. it is important to select a realistic strike price. Choosing a Covered Warrant with a strike price that you know the market will never be likely to reach, is unlikely to be a successful trade. the table below summarises the

different states of intrinsic value that a Call Covered Warrant may hold. Like many things, not all Covered Warrants are created equal. some are more sensitive to a change in the underlying asset price than others. the way to check this is to look at the Delta for your chosen Covered Warrant. the lower the delta, the less sensitive the Covered Warrant will be to a change in the price of the Underlying asset. this makes it both riskier and cheaper. many investors look for a Delta value between 30% to 60% for calls and between -30% to -60% for puts.

DESCRIPTION in the money at the money out of the money

CALL WARRANT spot > strike spot = strike spot < strike

PUT WARRANT strike > spot spot = strike spot > strike



Ben thompson

Building a fixed risk trading strategy

timing YoUr CovereD Warrants traDe

time value expiry


the second part of a Covered Warrants price is time value, which is affected by the amount of time before the Covered Warrant expires. if you are holding a Covered Warrant and the underlying asset for that warrant is the same tomorrow as it was today, the covered warrant price itself is likely to decrease either by a fraction if the covered warrant has a long life or by a clearly noticeable amount, if the covered warrant is short dated. this effect is known as time decay. time decay is highest for

short dated out of the money covered warrants and lowest for long dated in the money covered warrants. so when it comes to choosing a Covered Warrant, think about your market view and the timeframe over which you think it will occur. then multiply the timeframe by at least 2 or 3 in order to determine a suitable strike Date for your product. this will help reduce the effect of time decay over the anticipated time of the investment.

tHe imPaCt of imPLieD voLatiLitY

implied volatility is a measure of how erratic an underlyings price movements are likely to be. a new technology company for example tends to be highly volatile, whereas a more traditional company tends to be less volatile. generally, for both calls and puts, the higher the anticipated volatility level (implied volatility), the more expensive the Covered Warrant. this is because the price of a Covered Warrant is a reflection of the probability of it expiring in the money.

ANTICIPATED IMPLIED VOLATILITY LEVEL Underlying implied volatility increases Underlying implied volatility decreases

CALL PRICE increases Decreases

PUT PRICE increases Decreases

You should consider whether you think the markets are going to become more, or less erratic over the investment term as this will affect the price of your Covered Warrant.

Building a fixed risk trading strategy

Ben thompson

CHeCk tHe risk

all these factors will affect the price of the Covered Warrant and therefore the level of gearing that a Covered Warrant will provide. You need to be careful not to choose a Covered Warrant which is too highly geared, as gearing works both ways and should be seen more as a risk indicator than as a decision making criteria. When researching a Covered Warrant you can find all the product characteristics online at, including the product code, strike Price, Delta and effective gearing. You can use all these criteria to find a Covered Warrant that suits your view. You will also find a Covered Warrant simulator on our website which can help to illustrate what will potentially happen to the Covered Warrants value if your view plays out. Use the simulator to understand how changes in the underlying asset price, volatility and time will affect a given Covered Warrant. this will give you a better understanding of the potential risks and return for each product. the outcome of the simulator is for information purposes only and not an indicator or a guarantee of future performance. Under no circumstance should it, in whole or in part, be considered as an offer to enter into a transaction.

imPortant information
this article has been designed to help you understand the principles of geared investments. nevertheless, please be aware that societe generale does not offer investment advice. these products are suitable for retail and professional investors, who have a good understanding of the underlying market and product characteristics. it is important that you understand that you could lose all your capital when investing in these products, even if they are held until the end of their term. societe generale is the only market-maker and therefore the only liquidity provider for sg Covered Warrants, turbos and super10s. Liquidity will only be available in normal market conditions. this means that you may find it difficult or impossible in certain circumstances to sell the Covered Warrant or may be offered a price less than you paid for it. Covered Warrants, super10s and turbos are issued by societe generale acceptance n.v., a member of the soCiete generaLe group of companies. any failure of societe generale acceptance n.v. to perform obligations when due may result in the loss of all or part of an investment. investors should note that holdings in these products will not be covered by the provisions of the financial services Compensation scheme, nor by any similar scheme in Curacao. the securities can be neither offered in nor transferred to the United states.

We have explored a huge topic in a relatively short period but hopefully this article has given you an idea of how these products can be used within a trading strategy. Whether you want to play a very simple, non-directional view with super10s, or you opt for maximum leverage with Covered Warrants, the overriding theme is that you cant lose more than you invest with any of these products, which can be comforting in more uncertain markets. Before you make any decisions, there are guides for each of these products available on the societe generale website and you should also seek independent financial advice.

Ben Thompson Director, Marketing & Partnerships, ETPs UK formerly the Head of marketing for the Uk structured Products business at the royal Bank of scotland, Ben joined the sg team in february 2011 to build on the marketing and partnership programme for professional and retail investors in the Uk.

this is a marketing document issued in the Uk by the London Branch of societe generale. societe generale is a french credit institution (bank) authorised by the autorit de Contrle Prudentiel (the french Prudential Control authority). societe generale is subject to limited regulation by the financial services authority in the Uk. Details of the extent of our regulation by the financial services authority are available from us on request. any reproduction, disclosure or dissemination of these materials is prohibited.