Editor's note: With the diversified needs of residents, entities and financial institutions in risk management and wealth management, more and more OTC option structures appear in the public eye, in order to facilitate everyone to understand the characteristics and differences of various structures, China Securities Quotation Investment Education Base has launched a "Structure Notes" column, inviting traders to sort out the mainstream OTC option structures, introducing the risk-return characteristics and application scenarios of these structures, hoping to help you understand the role of various structures more comprehensively.
Cooperative institution: Guolian Securities Equity Derivatives Business Department
*This article snowball refers to an auto-callable option structure.
▍ What is a butterfly snowball?
The characteristic of the butterfly snowball is that the coupon changes with the time of knocking. Similar to the early-interest structure, the faster the butterfly snowball knocks out, the higher the annualized coupon is knocked out, which is suitable for investors who think that the underlying will rise in the short term, and the coupon adjustment method is also to reduce the later knock-out coupon to subsidize the coupon knocked out in the early stage. The only difference is that the early-interest structure knock-out coupon is usually divided by year, while the butterfly snowball is more detailed and flexible in the time period, and is divided into more yield stages according to the monthly split.
Compared with the classical structure and the early-profit structure, the butterfly snowball has the strongest short-term bullish tendency for the market outlook, and the highest knock-out coupon in the first stage is often set in the 1st-6th month, and the coupon decreases in the following knock-out periods such as 7-12 months, 13-18 months, and 19-24 months.
▍ Structural characteristics of butterfly snowball
1. The coupon setting is flexible and changeable, and higher returns can be obtained in the volatile market.
2. Provide falling safety cushion protection, and you can still make a profit if the market falls slightly.
3. Most of the investment targets are common broad-based indices or ETFs, with strong certainty.
▍ Butterfly snowball application scenario
1. There is a high bullish expectation for the short-term of the linked target, and it is believed that the market volatility will not be too large, and the possibility of a big fall is low.
2. By setting the knock-out coupon size for each time period, it can be adapted to investors with different views and risk-return preferences.
▍ Butterfly Snow Ball Reference Element
▍ Case scenario analysis
Scenario 1: During the 1st to 6th months of the duration, the closing price of a knock-out observation date is greater than or equal to the knock-out price, and the annualized coupon income is 25% of the notional principal;
During the 7th to 12th months of the duration period, if the closing price of a knock-out observation date is greater than or equal to the knock-out price, the annualized coupon income is 10% of the notional principal;
During the 13th to 18th months of the duration period, if the closing price of a knock-out observation date is greater than or equal to the knock-out price, the annualized coupon income is 5% of the notional principal;
During the 19th to 24th months of the duration, if the closing price of a knock-out observation date is greater than or equal to the knock-out price, the annualized coupon income is 2% of the notional principal.
Scenario 2: The closing price of a trading day during the duration has been less than the knock-in price, and the closing price of a knock-out observation day is greater than or equal to the knock-out price, and the annualized return is the coupon of the corresponding knock-out period.
Scenario 3: The closing price on any trading day during the duration is greater than or equal to the knock-in price, and there has never been a knock-out event, and the annualized coupon income is 2% of the notional principal.
Scenario 4: The closing price of a trading day during the duration has been less than the knock-in price, and there has never been a knock-out event, and the closing price on the maturity date is lower than the knock-out price: absolute yield to maturity = min (the rise and fall of the underlying price, 0);
If the closing price on the expiration date is greater than or equal to the opening price, but less than the knock-out price, the product will return 0%;
If the closing price on the maturity date falls by 10% compared with the beginning of the period, you need to bear a loss equal to the decline of the underlying price, and the absolute yield to maturity = -10%.
▍ Summary of profit and loss scenarios
▍ Risk warning
1. Risk-return characteristics: Xueqiu is an investment variety with R5 risk level, which is suitable for qualified investors with C5 risk identification, evaluation and tolerance.
2. Risk of loss of principal: Snowball is linked to a specific target, and if the market performance of the linked target is not good during the duration, the investor's principal and investment income will be affected. When the product has a knock-in and non-knock-out event, and the ending price of the underlying is less than the opening price, the investor will bear the loss according to the decline of the underlying asset.
3. Redemption restriction risk: Snowball will be held until the end of the duration without knock-out event, during which the product will not be set up on an open day unless there are special circumstances, and investors cannot withdraw in advance.
Disclaimer: The information in this article is for investor education purposes only and does not constitute any investment advice to investors, and investors should not substitute their independent judgment or make decisions based solely on such information. The information in this article is intended to be accurate and reliable, but the accuracy or completeness of such information is not guaranteed, and no liability is accepted for any loss or damage that may arise from the use of such information.