Leveraged Derivatives Explained

New to derivatives? Read Derivatives Basics first.

There are three main types of leveraged derivatives: Knock-Out Products, Warrants, and Factor Certificates. This article focuses on how each type works and the practical differences between them.

1. Knock-Out Products (Turbos)

The most popular type. If the underlying touches the barrier, the product expires immediately.

The critical distinction is whether the knock-out level is fixed or adjusts over time:

Classic Turbos (Fixed Maturity)

• Maturity: Fixed expiration date (weeks to months)
• Strike/Knock-Out: Set at issuance and does NOT change
• Financing costs: Baked into the premium at issuance
• Knock-out = Strike: Barrier and strike are identical
• At knock-out: Total loss
• At expiry (no knock-out): Pays intrinsic value

Since financing costs are pre-embedded, the strike stays fixed. Simpler, but higher premium.

Open-End Turbos (No Expiry)

• Maturity: Unlimited (open-end)
• Strike/Knock-Out: Adjusts daily to account for financing costs
• Knock-out = Strike: Barrier equals the strike
• At knock-out: Total loss

Since there's no fixed maturity, the issuer charges financing daily by adjusting the strike. The premium is lower than classic turbos — it only covers the issuer's gap risk: the market closes overnight, and if bad news breaks, the stock can open the next day far below the knock-out level. The issuer couldn't terminate the product in time, so they take a loss. This small premium compensates them for that risk.

Practical impact: If the underlying trades sideways, the daily strike adjustment slowly erodes your position — the strike moves closer to the current price each day (higher for Long, lower for Short).

Mini Futures

• Maturity: Unlimited (open-end)
• Strike ("Financing Level"): Adjusts daily, same as Open-End Turbos
• Key difference: The knock-out barrier ("Stop-Loss Level") is NOT equal to the strike
  • For Long: Stop-loss sits above the financing level
  • For Short: Stop-loss sits below the financing level
• At knock-out: You may receive a residual value

The dual adjustment:

1. Financing Level: Adjusted daily
2. Stop-Loss Level: Adjusted at least monthly, maintaining a buffer from the financing level

When a knock-out occurs, there's still intrinsic value remaining — the issuer liquidates and pays you the residual. The trade-off: the stop-loss is closer to the current price (so it triggers sooner), but unlike Open-End Turbos, you don't lose everything when it does.

Pricing: A Mini Future's price equals intrinsic value only (no premium).

Comparison

2. Warrants

The right, but not the obligation, to buy (Call) or sell (Put) at a certain price before expiration.

• No knock-out barrier — they don't expire on a price touch
• Fixed maturity — they have an expiration date
• Subject to time decay: the closer to expiry, the faster the warrant loses value — even if the underlying doesn't move
• Sensitive to implied volatility: if the market expects bigger price swings, warrants become more expensive (and vice versa)

The core trade-off vs knock-outs: You can never get knocked out — even if the underlying moves heavily against you, the warrant still has value until expiry. But you pay for this safety through a higher price (significant time value on top of intrinsic value) and ongoing time decay.

Example: A knock-out with a strike of 95 EUR on a stock at 100 EUR might cost 5 EUR (pure intrinsic value). A warrant with the same strike might cost 8 EUR (5 EUR intrinsic + 3 EUR time value). The warrant is more expensive, but it won't expire if the stock briefly dips to 95.

3. Factor Certificates

Constant daily leverage (e.g., 2x, 3x, 5x, 10x) that resets every trading day.

• No knock-out barrier
• Path dependency / Volatility drag: Due to daily reset, they suffer from compounding in volatile or sideways markets
• Designed for short-term / intraday use — can work over multiple days in strongly trending markets, but volatility drag increases the longer you hold
• Financing costs incurred daily

Example of volatility drag: You invest 100 EUR in a 3x factor certificate. The underlying goes up 5%, then down 5%.

• Day 1: Underlying rises 5%. Your certificate rises 3 × 5% = 15% → 100 × 1.15 = 115 EUR
• Day 2: Underlying falls 5%. Your certificate falls 3 × 5% = 15% → 115 × 0.85 = 97.75 EUR

The underlying is back to nearly where it started (down just 0.25%), but your certificate lost 2.25%. The Day 2 loss of 15% was applied to the higher base of 115, not your original 100. This compounding effect gets worse with higher leverage and more volatile markets.

Major Issuers

Structured products are issued by major investment banks:

HSBC, Societe Generale, Vontobel, UBS, Citi, Goldman Sachs, BNP Paribas, Morgan Stanley

The available issuers depend on which broker you use.

Other Structured Products (Non-Leveraged)

The market also includes investment-style certificates that are not leveraged:

• Discount Certificates — Buy at a discount, capped upside
• Bonus Certificates — Bonus payment if a barrier is never breached
• Express Certificates — Early redemption at predetermined dates
• Capital Protection Certificates — Principal protection, limited upside
• Reverse Convertibles — Higher coupon, downside risk to underlying

Regulatory Landscape

BaFin Restrictions (October 2025)

The German financial regulator found that 74.2% of retail investors lost money trading turbos (average loss: 6,358 EUR). Total retail losses over 5 years exceeded 3.4 billion EUR.

New requirements for German brokers:

• Mandatory risk warnings
• Appropriateness tests before trading
• Ban on financial incentives to encourage turbo trading
• No leverage caps imposed, despite leverage exceeding 100:1

Key Takeaways

• Classic Turbo: Fixed strike, higher premium, total loss on knock-out
• Open-End Turbo: Adjusting strike, lower premium, daily financing costs erode sideways positions
• Mini Future: Separate stop-loss buffer, possible residual payout on knock-out
• Factor Certificate: Daily leverage reset, compounding drag — intraday only
• Warrant: Most flexible, no barrier, but affected by time decay and volatility

References

• UBS: Turbo Warrants - Understand and Use Leverage Products
• Vontobel: Mini Futures - How They Work
• SIX Structured Products: Mini Futures
• Goldman Sachs: Knock-outs
• HSBC Zertifikate-Akademie: Mini Futures vs Open End-Turbo-Optionsscheine
• PayTechLaw: BaFin Puts Turbo Certificates on a Tight Leash
• FX News Group: Germany's BaFin to Restrict Trading in Turbos

Not financial advice. Always do your own research.

Last updated: February 2026