Tutorial: Turbos

What are turbos?

With a turbo investors can realise their personal market opinion with little money invested. The redemption amount of a turbo depends on the performance of the underlying. At the beginning of the term, the strike price and the barrier are set. For products without a defined term ("open end"), the strike price and barrier are adjusted on a regular basis.

A turbo long profits from rising prices of the underlying. Here, the barrier is set below the current price of the underlying. A turbo short benefits from falling prices of the underlying. Here, the barrier is set above the current price of the underlying. Even the smallest fluctuation in the price of the underlying asset can lead to higher profits due to the leverage effect than when investing directly in the underlying asset. The unlimited earning potential, however, is offset by the risk of total loss of invested capital if the specified price barrier is breached.

How do turbos work?

A turbo offers the investor the opportunity to benefit from price movements of an underlying with leverage effect. The leverage effect results from the lower purchase price of a turbo compared to a direct investment in the underyling asset. The lower the purchase price of a turbo, the greater the leverage. This can be easily calculated: Leverage = (base price / price of turbo) * ratio.

If the price of the underlying rises, the price of the turbo long increases disproportionately in line with the selected leverage. The intrinsic value of a turbo long is calculated as the difference between the stock price and the strike price. If the price of the underlying falls, the price of the turbo short increases disproportionately according to the selected leverage. The intrinsic value of the turbo short is calculated as the difference between the strike price and the share price. A turbo has the disadvantage that it expires worthless upon reaching a predefined barrier or the investor only receives a possible residual value.

Your benefits

Active, market-oriented investors may find turbos an interesting investment to profit in the short term from market movements with leverage effect. Both for rising markets (turbo long) and for falling prices (turbo short) there are a variety of products. A turbo short thus offers one of the few opportunities on the stock market to benefit from falling prices.

Your advantages

The return potential is disproportionately high due to low capital investment and the leverage effect.
With turbos long investors benefit from rising prices, with turbos short from falling ones.
The influence of time value and volatility is very low.

Risks you should be aware of

There is no capital guarantee and a total loss of invested capital is possible.
The leverage effect can lead to disproportionate losses.
Investors bear the risk of the issuer (Erste Group Bank AG).
Turbos are not covered by any deposit guarantee scheme. Investors are exposed to the risk that Erste Group Bank AG may not be able to meet its obligations arising from the turbo in the event of insolvency or over-indebtedness or from an official order (bail-in regime). A total loss of invested capital is possible.

How do turbos react to…

… rising underlying prices?
With rising underlying prices the price of a turbo long rises and the price of a turbo short falls at a disproportionately high level in accordance with the leverage chosen.

… stable underlying prices?
With stable underlying prices the price of turbos is influenced by the financing costs. They fall for a turbo long over time, so there may be a loss, and they rise for a turbo short, so there may be gains.

… falling underlying prices?
With falling underlying prices the price of a turbos long falls and the price of a turbo short rises at a disproportionately high level in accordance with the leverage chosen.

Payoff-Chart

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