Turbo warrant is a kind of stock option. Specifically, it is a barrier option of the Down and Out type. It is similar to a vanilla contract, but with two additional features: It has a low vega, meaning that the option price is much less affected by the implied volatility of the stock market, and it is highly geared due to the possibility of knockout.
The strike price of the option is generally the same as the barrier: if the stock hits the barrier, the option expires and becomes worthless. Variations on turbos include: forms where the strike and barrier are not identical; forms where the barrier is only active at, for example, the close of business but the strike is continuously monitored (smart turbos); and forms with no fixed maturity (minis).
For comparison, a regular call option will have a positive value at expiry whenever the spot price settles above the strike price. A turbo will have a positive value at expiry when the spot settle above the strike AND the spot has never fallen below the strike during the life of the option (if it had done so the option would have crossed the barrier (=strike) and would have become worthless).
Read more about Turbo Warrant: Markets, Price Calculation, When To Use Turbo Warrants, Exchanges
Famous quotes containing the word warrant:
“Here’s to the maiden of bashful fifteen;
Here’s to the widow of fifty;
Here’s to the flaunting extravagant queen;
And here’s to the housewife that’s thrifty.
Let the toast pass,—
Drink to the lass,
I’ll warrant she’ll prove an excuse for the glass.”
—Richard Brinsley Sheridan (1751–1816)