With already more than 600 listed products available, mini-futures are becoming increasingly popular in Switzerland. If you compare them to warrants, you’ll see that mini-futures have basically the same characteristics as knock-out products: they’re open-ended and thus have no predefined term to expiration. If their knock-out threshold is touched or penetrated, they expire immediately and the issuer flattens the position. In such an event, investors receive payment of the residual value.
The closer the current market price of the underlying instrument is to the knock-out level, the more speculative the mini-future is because it demonstrates tremendous leverage. The leverage can be calculated as follows:
(price of underlying instrument x exercise ratio) / price of mini-future
= (CHF 15.00 x 1) / CHF 2.00
As is the case with normal warrants, you can establish long (call) or short (put) positions in mini-futures. And of course when you’re long you profit from rising prices, and the opposite holds true with a short position. Because mini-futures have no specified expiration date, they always have to be outfitted with a knock-out threshold…after all, the only things that never stop are you tax bills. Once the threshold is touched or penetrated, the product is knocked-out and the position flattened.
A quick look at the advantages of mini-futures:
|Term to expiration:||open end|
|Share price:||CHF 15.00|
|Financing level:||CHF 13.00|
|Knock-out threshold:||CHF 14.00|
|Price of the mini-future:||CHF 2.00|
Theoretically, a mini-future’s value is calculated on the basis of the underlying instrument, the financing level and the exercise ratio:
(price of underlying instrument – financing level) x exercise ratio
= (CHF 15.00 – CHF 13.00) x 1
= CHF 2.00
In the actual market price, the mark-up (i.e. premium; see discussion on knock-out warrants) plays an important role.