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  5. What is Turbo Warrant and How Do Turbos Work?

What is Turbo Warrant and How Do Turbos Work?

What is Turbo Warrant and How Do Turbos Work?

Today there are many tools to invest according to your appetite for risk and capital. Turbos, better known as turbo warrants, are an instrument for those who seek to maximise their profits at the cost of assuming a little more risk.

In this article, we will see what a Turbo consists of, how they work, their characteristics and an example of how to operate with them.

What is a turbo?

A Turbo is a leveraged product known as turbo warrants or turbo certificates. Turbos are derivatives that follow an underlying asset and whose price moves point by point with that asset, which can be from a stock index like the Ibex 35, a share like Apple or a currency pair like the USD/EUR, but which they operate on a trading system rather than over-the-counter (OTC) market.

Through a turbo warrant, you can invest in the asset you want without having to pay its full cost, thanks to leverage. In addition, you can do short and long. This allows enormous flexibility when investing but also higher risk.

Each turbo trade has a built-in maximum loss limit or level to control this. When that level is reached, the position is closed, so you always know the formula to control the risk and maximum loss you assume.

The Turbos are a type of warrant that they sell at the Trade Republic broker.

What is a Turbo24

On the other hand, the Turbo 24 are another type of warrant that is traded on the alternative derivatives market Spectrum Markets, which also have the particularity that they can be traded 24 hours a day, something that not all warrants allow.

Turbo characteristics

In the definition of Turbo, you have already seen some of its main qualities, but not all. The essential characteristics of a turbo warrant:

  • They are listed on the stock market and not on OTC (Over The Counter) or over-the-counter markets.
  • They allow you to invest upwards with a turbo call or long turbo and downwards with a turbo put or short turbo.
  • The evolution of the price depends on the underlying asset.
  • They allow different leverage levels (we will explain this in detail later).
  • It has a barrier level or limit loss, also called the knockout level. If the underlying asset reaches that level, the turbo warrant expires or is sold. This is how the loss is limited, or the level of risk is chosen, buying a turbo in which the underlying asset’s price is more or less close to that barrier.

The difference between the underlying asset’s price and your barrier level determines the price of the turbo. It is easy for this to remind you of a CFD, although, as we will see later, they are different products.

Differences between a turbo and a CFD

CFDs are contracts for difference, another type of financial derivative that allows you to invest without buying or selling any underlying asset. Instead of buying, what you do with a CFD is trade on the difference in the asset’s value between the level at which the contract is opened and at which it is closed, hence its name.

How a Turbo works

A turbo allows you to take long or short positions on an asset by taking advantage of leverage. When investing, you bet because that asset will go up or down.

All turbos follow the price of the underlying asset, and you, as an investor, choose the exit or knockout level you want. In other words, how much are you willing to lose?

If the market turns against you, the position will be unwound at that point, limiting your losses. That’s why you know the maximum loss you can experience with a turbo in advance. That difference between the asset’s price and your starting point will also determine the price of the turbo, which you will pay as a deposit in advance.

To understand well how a turbo works, we are going to see how to operate with them. There are long turbos and short turbos. As mentioned, a turbo allows you to go long or short on an underlying asset.

With a long turbo or turbo call, you are betting that the asset’s price will go up. I mean, you’re getting long. In a long turbo, the knockout level is below the cost of the underlying asset, so if you are wrong and the market falls, your losses will be limited.

Turbo leverage

Leverage is a tool to maximise your resources and financial investment. In the case of turbos, it allows you to invest without having to buy the asset or pay its total value.

Thanks to the leverage of the turbos, you will only pay a part of the cost of the position you assume, which will be the difference between the asset’s price and your exit or knockout point.

Through turbo leverage, you can invest more capital and maximize your amplified profits. In this article, we explain exactly how financial leverage works.

The advantage of turbos is that you can pick and see the leverage of the trade and the risk you take. This level of leverage is directly related to the barrier or knockout price, which you can see on trading platforms such as IG or Spectrum Markets.

As a general rule of thumb, the lower the turbo price, the higher your leverage. In the next point, you will understand it better.

The price of the turbo is set by the difference between the underlying market price and the knockout level, which will be your limit loss, plus any costs and adjustments already included in the price of the Turbo.

This money will be paid as an initial deposit. When you close the trade, your profit will be that amount plus the profit or loss depending on how far the turbo price has moved away from or close to the knockout level.

Of course, the turbo position is usually closed at the end of the trading day. If you decide to hold the position during the night, you will have to add additional costs. Many brokers will adjust the knockout level, so you don’t have to pay them.

Very briefly, imagine that you open a position on a company that is trading at 60 euros with a knockout level of 52 euros (long turbo). The cost of opening the turbo would be 8 euros.

If the share price is 60 euros, you will receive 8 euros. However, if it goes up to 65 euros, you will receive your initial 8 euros plus the five difference. In total, you will have won 13 euros or 63%.

If you had invested directly in those shares, your profits would be 8%. Surely now you understand better the effect of leverage.

On which platforms can I trade Turbo24?

You can currently contract turbos on platforms such as the Trade Republic Broker. Turbo24s can be traded through IG – and from January 2023 through other brokers – and on the Spectrum Markets trading venue.

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