Turbo Warrants
A new generation of investment products
What are Turbos?
Turbos are a new breed of ASX listed warrants being offered by CitiWarrants® and are available over a broad range of indices and listed securities, with the choice of both call and put warrants. Turbos allow you to participate almost dollar-for-dollar (i.e. approximately delta 1) in the performance of the underlying share, after taking into account any conversion ratio, without having to pay the full up-front cost of the share.
In addition to regular Turbos, CitiWarrants also offers Turbo “Stop-Loss” warrants. These are Turbos with a rebate, an inbuilt “stop-loss” mechanism to protect you from unexpected adverse movements in the underlying index or share.
*Further information on Turbo Warrants is available in the relevant Offering Circular or Product Disclosure Statement (PDS), it is strongly recommended that investors read this document in full, including the terms and conditions and the section on risks.
Investment Profile
| Minimum Time Horizon (Months) | 1 or Less | 1-3 | 3-6 | 6-12 | More than 12 |
| Risk | Very Low | Low | Moderate | High | Very High |
| Investment Objective | Capital Protection | Income |
Income/ Growth |
Growth | Enhanced Growth |
What are the benefits of Turbos?
| Low cost | Liquidity |
| ASX listed | Minimal time decay |
| Approximately Delta 1 | Leveraged exposure |
| Calls and Puts available | Turbo “Stop-Loss” warrants available |
How do Turbos work?
Turbos will be traded on the ASX, and you will be required to pay an upfront premium just like a regular warrant. The amount of this premium will be equal to the difference between the current price of the underlying share and the exercise price of the Turbo, plus a risk margin. This premium represents only a fraction of the cost of the underlying share. Being almost delta 1, Turbos should track the performance of your chosen share almost dollar-for-dollar after taking into account the conversion ratio.
To achieve the high level of gearing offered by Turbos for such a small upfront premium (relative to the cost of a vanilla warrant with similar terms), a Turbo uses a “barrier” feature. The “barrier” feature means that if the underlying share ever trades at or breaches an agreed level (i.e. the “barrier level”), your Turbo will terminate automatically. If your Turbo is terminated due to a breach of the barrier level, your loss is limited to the premium you paid for the Turbo. However, in the case of a Turbo “Stop-Loss”, your loss is reduced by a partial rebate of you premium (see below “What is a Turbo Stop-Loss?”).
What is a Turbo “Stop-Loss”?
A Turbo “Stop-Loss” is similar to a regular Turbo except that it has an inbuilt “stop-loss” feature designed to rebate part of the premium you paid for the Turbo. The “stop-loss” feature works so that as soon as your chosen share trades at or below the agreed barrier level, Citigroup will automatically sell the underlying shares and rebate you part of the initial premium you paid. The amount of the rebate (if any) will be equal to the difference between the exercise price of the Turbo “Stop-Loss” and the average of the weighted average sale price of the underlying shares on each of the 5 trading days following the date on which the barrier level is breached.
For example
| Underlying share | ABC Limited |
| Warrant type | Turbo “Stop-Loss” call warrant |
| Barrier trigger | On-Close |
| Expiry date | 6 months |
| Exercise price | $10 |
| Barrier level | $15 |
*This example is hypothetical and does not represent an actual trading scenario.
Assume that the closing price of ABC shares is $14 on a particular trading day, below the barrier level of $15. Because the warrant is a Turbo “Stop-Loss” warrant it will terminate automatically as a result of the breach of the barrier level. In addition, the “stop-loss” feature means you will be entitled to a cash rebate equal to the difference between the exercise price of the Turbo “Stop-Loss” (e.g. $10) and the average of the weighted average sale price of ABC shares on each of the next 5 days (e.g. lets assume the average of the 5 weighted average sale prices is $13, in this case the rebate amount would be $3 (or $13-$10) per warrant).
Why is the “Barrier Trigger” important?
The “barrier trigger” is important because it determines when a Turbo will automatically terminate due to a breach of the barrier level. There are 2 types of barrier triggers: (1) “Single-Touch” barrier trigger, where the Turbo will terminate automatically at any time on any trading day where the underlying share trades at or breaches the barrier level; or (2) “On-Close” barrier trigger, where the Turbo will terminate automatically on any trading day where the closing price of the underlying share is equal to or breaches the barrier level. In general, a regular Turbo will usually have a “Single-Touch” barrier trigger while a Turbo “Stop-Loss” will have an “On-Close” barrier trigger.
What happens on the Maturity Date?
If your chosen shares do not trade at or below the barrier level for a Turbo or Turbo ”Stop-Loss”, and you do not exercise your warrant, then on the maturity date Citigroup will pay you the difference between the closing price of your chosen shares and the exercise price of the Turbo (where the closing price is above the exercise price in the case of a call warrant or below the exercise price in case of a put warrant).
Tips on how to trade Turbos
- Be conscious of the ”barrier level” in relation to the share price
- Know whether the barrier trigger is “Single-Touch” or “On-Close”
- Monitor market events as closely and frequently as possible
- Don’t buy too close to the ”barrier level”
- Bear in mind that higher gearing also implies higher risk
Low Time Decay of Turbos
Time value is that portion of the value of a warrant or option related to the time remaining until expiry.
Time decay has long been one of the most important factors for traders to be conscious of when trading warrants. Most warrants and other options will ordinarily have the greatest time decay during the last third of their life and investors must be constantly aware of this loss of value while investing in these instruments.
However, Turbos are primarily made up of intrinsic value meaning that they only exhibit a small erosion of value due to time decay. This minimal time decay associated with Turbos is best shown in a graphical example of a Turbo call warrant’s time decay profile compared with the time decay profile of an ordinary call warrant.
Assumptions: Strike 98% of stock price, 3 months to maturity, same and unchanged volatility and interest rates
This chart is for illustrative purposes only. It is not intended to reflect the actual time decay associated with vanilla warrants or Turbo warrants.
What are the risks?
- Potential loss of premium if the barrier level is reached or the Turbo expires worthless.
- You should refer to the relevant Offering Circular or Product Disclosure Statement for more detailed information about the risks of investing in Turbo warrants.
More Information
For further information on structured financial products contact the Citigroup Structured Products Service Centre.| Phone | : | 1300 30 70 70. | |
| : | citifirst.au@citi.com | ||
| : | GPO Box 40, Sydney NSW 1027 | ||
The Financial Products referred to on this page are issued by Citigroup Global Markets Australia Pty Limited (ABN 64 003 114 832 and AFSL No. 240992, a Participant of the ASX Group and a Participant of the Sydney Futures Exchange Limited. This Site is provided for information purposes only and is not an offer, solicitation, recommendation or advice to buy or sell CitiWarrants®. While the information is based on sources believed to be reliable, we do not guarantee its accuracy and it may be incomplete or out of date. For complete and accurate information on CitiWarrants, refer to the relevant Product Disclosure Statement on this Site. Prices quoted may differ from the actual prices at which an investor may buy or sell a Warrant. Warrants can be traded on ASX and investors can obtain a copy of the Product Disclosure Statement by contacting a Citigroup Wealth Advisor Financial Consultant or the CitiWarrants Hotline on 1300 30 70 70. Investors may also apply for CitiWarrants under the Product Disclosure Statement. Warrants are not bank deposits or obligations of, or guaranteed by, Citibank, N.A., Citibank Pty Limited or any of its affiliates or subsidiaries and are subject to investment risks, including the possible loss of the principal amount invested. This information does not take into account the investment objectives or financial situation of any particular person. Investors should be aware that there are risks of investing and that prices both rise and fall. Investors should seek advice from a Financial Consultant based on their own circumstances before making a decision. Citigroup and the Umbrella Device logo are service marks of Citigroup Inc. or its affiliates used and registered throughout the world. © 2006 Citigroup Global Markets.