Outperformance certificates enable you to participate disproportionately in price advances in the underlying instrument if it trades higher than a specified threshold value. To that purpose, these certificates are equipped with a strike price and a participation factor. The participation factor kicks in only once the strike price has been exceeded and most often lies – depending on the term to maturity and underlying instrument – between 120 and 200 percent. In return, you waive the right to receive dividends on the underlying instrument.
When buying one of these structured products, you should make sure that the price of the underlying instrument is not already far above the predetermined strike price; this is because – as we’ve frequently mentioned – leverage is a door that swings both ways, and in such an instance you’d be bearing a greater risk of loss.
Outperformance certificates are suited only to investors who anticipate rising prices.
At levels above the strike price of CHF 300, you’ll profit at a 150 percent rate in any further gains in Syngenta. So let’s assume that on the expiration date, the stock closes at CHF 330, representing a 10 percent increase. To figure out what you’ll receive as a repayment, simply take the difference between the latest share price and the strike price (i.e. CHF 30) and multiply it by the 1.5 participation factor. Adding that result to your original purchase price of CHF 300 results in a total repayment of CHF 345 for each certificate you own – in other words, a return on investment of close to 15 percent. However, if the price of Syngenta lies below the strike price on the expiration date, you’ll participate 1:1 in the losses on the shares.
Example of a capped outperformance certificate
Remainung term to maturity :
Current price of certificate:
Current price of stock:
Up to the cap of CHF 420, you’ll participate in the gain at a rate of 150 percent. Thus if Swisscom rises by 20 percent to CHF 420, you’ll book a 30 percent profit. However, your participation in the gain will stop once the cap is exceeded. In other words, even if the Swisscom were to go up by 40 percent, your profit would be limited to 30 percent.