Societe Generale has issued 59 new discount calls & puts warrants on VStoxx futures targeted at investors seeking to capitalise on volatility fluctuation. The products are available to German and Austrian investors.
The underlying VStoxx futures derives from the VStoxx index 50 and depicts the extent of expected volatility (implied volatility) of the Eurostoxx 50 for the next 30 days. Implied volatility is one of the key factors in the pricing of options and warrants, as a rise in volatility will impact both the prices of calls as well as those of the puts, said Alana Maue (pictured), product manager cross-asset at Societe Generale, adding that the new discount warrants provide a price discount to the base value - "so investors can generate returns even in sideways markets".
"We believe the discount mechanism will appeal to investors because they will benefit from moderate falling/rising volatility as opposed to being exposed to sharp movements depending on their view of where the volatility of the Eurostoxx 50 stocks," said Maue.
According to Maue, a strong increase in volatility usually occurs during sharp value falls while a decline in the volatility occurs when values are rising, and that the advantage of a short investment term allows investors to invest according to their market view only for a short period. The new Societe Generale discount warrants relate to short-term periods of VStoxx futures (May 2016 -June 2016 July 2016, and September 2016 to October 2016).
In general, discount warrants on VStoxx Futures combine the advantages of discount certificates and warrants, as investors participate in the performance of the underlying up to a specified limit (cap) above or below the strike price which diminishes the risk of capital loss compared to direct investment in stocks, according to Maue.
However, if the VStoxx Futures don't go in the expected direction, investors' capital is at risk. Discount warrants have a lower leverage than standard warrants, but in return, they are more defensive oriented than traditional warrants, said Maue.
"These products are targeted at sophisticated traders and investors as capital is at risk and the underlying is slightly more complex as it's not a standard cap weight index but an index on volatility," said Maue. "Investors need to be aware of the risks and have an eye on the market volatility on a daily basis."
According to Maue, this kind of product provides a tool for tactical trading on volatility and hedging purposes as opposed to a buy-and-hold investment. "We will continue to keep an eye in the market to capitalise on market movements and provide investors with products they can use for opportunistic trading," said Maue. "We think the timing [for this launch] is right because the levels of volatility around European stocks is very low at the moment and provides a chance for traders to play their views on the market."
"The products make it possible to act in a simple way around market expectations with respect to the volatility," said Peter Bösenberg, director and head of public distribution Germany & Austria at Societe Generale, in a statement. "They are targeted at investors who expect future vale falls sharply and strong value gains on the Eurostoxx 50 and want to represent their market opinion with a certain safety margin".
SG rolls out iTraxx-linked CLN; no comment on Bafin investigation
SG debuts smart beta play in UK