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How to trade certificates?

Trading certificates is very much similar to trading stocks or ETFs. It primarily depends on the specific type and financial leverage the certificate may contain.

Maturity period

Investment certificates are issued with no expiration date, e.g. "open-ended" or have a defined trading period. Maturity can range from months to years and is defined to a specific date in the future.

Long and short positions

By purchasing an investment certificate an investor takes the long position or takes the short position by selling the investment certificate (without any prior purchase). Short positions cannot be opened for investment certificates. This is resolved by the fact that the issuer issues investment certificates for the purchase of the underlying asset (long or call) and for the sale of the underlying asset (short or put). By buying such a short certificate we are actually selling the underlying asset and speculating on a drop in the price of the asset.

Within this process, "buy" certificates are marked with the words "long" or "call" and "sell" certificates are marked with the words "short" or "quote". If not marked, certificates are considered to be "buy" certificates.

Leverage

Leverage is seen in the difference between the current price of the certificate and the price of the underlying asset. It is also reflected in that the development of the price of the certificate is directly (for long certificates) and indirectly (for short certificates) derived from the development in the price of the underlying asset but is multiplied a number of times for the movement of the certificate. Such leverage exists for turbo certificates. Leverage multiplies both profits and losses. As the underlying asset approaches the strike price, the greater the leverage.

  • The amount of leverage in a turbo certificate changes and depends on the current price of the certificate and the relationship between the price and the strike price.
  • Calculating leverage for turbo long = 100 / (((price of underlying asset - strike price) * issue ratio) /price of underlying asset)
  • Calculating leverage for turbo short = 100 /(price of underlying asset/((strike price - price of underlying asset)*issue ratio)
  • Leverage directly relates to increased risk when investing as the higher the leverage so to is the higher the risk.

Determining a certificate price

A certificate price can easily be determined using the price of the underlying asset in most cases. If the issuer is abroad, a majority must be converted into CZK from EUR or USD. For this reason the exchange rate must also be considered. This also applies if the underlying asset is expressed in a currency other than the issuer's currency.

  • Determining the price of a long certificate = (price for the underlying asset/issue ratio)
  • Determining the price for a turbo certificate = (price of the underlying asset - strike price)/emission ratio
  • Determining the price for a turbo short certificate = (strike price - price of the underlying asset)/issue ratio

Risk of issue sell out

In the event of a great deal of interest in the given certificate, a situation can occur where the issuer sells all investment certificates and will not be able to increase the subscription within the prospectus or the final terms. The issuer will then stop selling additional investment certificates and will only purchase until it purchases enough certificates for additional sales.

Lot

A lot represents the minimum number of certificates that an investor can buy or sell in a single trade.

Knock-out limit

The knock-out limit is defined exclusively for turbo certificates. If the price of the underlying asset reaches the knock-out limit, the investment certificate is terminated (the specialist halts buying and selling the certificate). A certificate holder is then paid the remaining value of the certificate. This price fluctuates between the knock-out limit and the strike price and is defined after the issuer decides to exercise its right to buy or sell the underlying asset. If the value of the underlying asset approaches the knock-out limit, no margin calls are completed and the investor must monitor the development of the underlying asset to secure his or her own interests.

Strike

A strike price is only defined for turbo certificates and warrants. This is a predefined price at which the issuer can immediately conclude a trade involving the underlying asset. For a long certificate this is a predefined sell price and for a short certificate it is a predefined buy price.

E.g. If a long certificate has a strike price of CZK 100 and the current value of the underlying asset is CZK 160, the issuer will not sell the certificate at the strike price (CZK 100), rather it will use the current market price (CZK 160). For this reason the trade will not be completed and the certificate will not be removed from the market. The investor in this case will profit in the range from CZK 160 to 100. As the market price approaches the strike price, the investor's profits shrink. If the strike price matches the current price, the investor's profit is zero. However the investor will not be exposed to this situation as a small amount is secured by the knock-out limit.

Issue ratio

The issue radio defines the relationship between the certificate's price to the value of the underlying asset. As a rule this is expressed as a ratio: 1 to 10 or 1 to 100.

Example:

If we have an unleveraged certificate and the underlying asset is the PSE index, which at the time the certificate was issued is 1600 points, the certificate will be assigned a value of CZK 160. If the PSE rises to 1700 points, the certificate price rises to CZK 170. If it drops to 1500 points, the certificate price drops to CZK 150.

Trading fees for investment certificates

No entry, exit or management fees are charged, only regular trading fees and market fees apply.

Dividends

Certificate holders in most cases are not paid any dividends. If the underlying asset is a stock, then the price of generally falls by the amount of a dividend after the decisive day for the dividend payment on the underlying asset. In order to maintain the price of the certificate, changes are made to the strike price and knock-out limit.


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Exchange Rates

BuySell
EUR25,0916226,37838
USD22,4006223,54938
GBP28,9974730,48453
CHF21,9238523,04816
PLN5,850976,15103

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