0

I wonder how the leverage (not the price) of an option changes over time and why so quickly? Naively speaking, I think of an option as the possibility to buy a stock at a certain price. If an option has a leverage of 5, I assume, I simply have the possibility to buy 5 stocks of the underlying at a certain price. So if I execute the option, I make money as follows:

  • win = 5 x (cur_price - buy_price).

As a concrete example, 2 days ago, I went short on Tesla, because I figured the debate about Musk's pay package should lead to a lower price.

I bought this option from Unicredit:

  • Stock price at the time: ca. 190$
  • Leverage ca. 10
  • Strike price: ca. 205$
  • No expiration date (I've heard this is mostly the case for European options)

Luckily, Tesla's stock price declined by 5% and the option's price rose by ca. 48%.

Now looking at it today, the leverage as shown on the option product page is only 6.46.

My questions are:

  1. Why did the leverage change at all?
  2. Why did the leverage fall by 30% in only 2 days?
  3. How can I invest in a stock for say a year with a constant leverage?

I would be grateful for an intuition as well as math. Thanks for your help!

TreeLeopard
  • 3
  • 2

1 Answers1

2

You really shouldn't buy such a product if you have no idea what it is and how it works, especially if the KID states it's the highest level of risk. This is not a simple option. It's even with a daily resetting knockout (if I read the German term sheet properly), meaning if the knockout barrier is hit, you lose all your capital.

  • Leverage for a vanilla option is delta * stock price /option price, as explained here. As you can see, your idea of leverage with options is quite wrong.

  • Leverage in this particular security you reference is computed as price underlying * subscription ratio /price of turbo (Hebel = Kurs des Basiswerts x Bezugsverhältnis / Preis des Turbo). The closer the price of the underlying to the price of the turbo, the bigger the leverage (and the more likely the knockout).

  • You cannot invest in an underlying for a year with a fixed, say 10x leverage (unless you rebalance all the time). Any leverage requires derivatives. If you Google constant leverage you will find lots of results but they should all be on a daily basis. You can see here what this really means.

AKdemy
  • 3,059
  • 1
  • 13
  • 34