Turbo Warrants

Turbo warrants, also known as turbo certificates or callable bull/bear contracts, are a form of derivative, mainly traded in Europe and Hong Kong. In this tutorial, we explain what a turbo warrant is, how they work, their pricing, pros and cons, example strategies, plus steps to get started trading. We also list the best brokers for trading turbos in 2024.

Turbo Warrant Trading Brokers

  1. IG

#1 - IG

Why We Chose IG

Founded in 1974, IG is part of IG Group Holdings Plc, a publicly traded (LSE: IGG) brokerage. The brand-US offers spread betting, CFD and forex trading across an almost unrivalled selection of 17,000+ markets, with a range of user-friendly platforms and investing apps. For 50 years, IG has maintained its position as an industry leader, excelling in all key areas for traders.

"IG continues to provide a comprehensive package with an intuitive web platform and best-in-class education for beginners, plus advanced charting tools, real-time data, and fast execution speeds for experienced day traders."

- DayTrading Review Team
  • Instruments: CFDs, Forex, Stocks, Indices, Commodities, ETFs, Futures, Options, Crypto, Spread Betting
  • Regulator: FCA, ASIC, NFA, CFTC, DFSA, BaFin, MAS, FSCA
  • Platforms: Web, ProRealTime, L2 Dealer, MT4, AutoChartist, TradingCentral
  • Min. Deposit: $0
  • Min. Trade: 0.01 Lots
  • Leverage: 1:30 (Retail), 1:250 (Pro)

Pros

  • The IG app offers a superb mobile trading experience with a clean design that helped it secure Runner Up at our Best Trading App award
  • The ProRealTime advanced charting platform is free as long as certain modest monthly trading activity requirements are met
  • IG is amongst the best in terms of its range of instruments, which includes stocks, forex, indices, commodities, and cryptocurrencies, providing ample diversification opportunities

Cons

  • Beginners might find IG’s fee structure complex, with various fees for different types of trades or services, potentially leading to confusion or unexpected charges
  • IG applies an inactivity fee of $12 per month after 2 years, deterring casual investors
  • While there is negative balance protection in the UK and EU, there is no account protection or guaranteed stop losses for US clients

Turbo Warrants Explained

A turbo warrant is a leveraged security and type of barrier option. Similar to other types of options, if the value of an asset moves in the speculated direction by expiry, a pre-determined payout is issued. Importantly, the price of a turbo warrant matches the value of the underlying financial asset, for example, a stock.

Turbo contracts typically have high leverage, low volatility, and a built-in knock-out level where the asset’s price at purchase (spot price) has to hit a certain value (strike price) to terminate and void the turbo. Turbo warrants are primarily used for going long or short and for hedging.

How Turbos Work

Turbo warrant trading works by buying a transferrable security based on the value of an underlying asset. This means you take a position on an asset’s price either increasing or decreasing. Traders use their market knowledge and experience to preempt fluctuations.

As mentioned above, for every trade you pick a knock-out level. This is the cut-off point where the turbo contract will expire when the strike price is reached. This limits profits for the seller and limits losses for the buyer.

Like other barrier options, turbo warrants are path-dependent. The price has to decrease to reach their barrier or knock-out level which equates to the trader’s strike price. This means that buyers and sellers of turbo warrants have opposing expectations.

There are two main types of turbo warrants:

Pricing

The knock-out level dictates the price of a turbo warrant and your total leverage, as it is mainly based on the difference between the underlying market price and the selected knock-out level. This price will be your maximum loss. This cost is paid in full upfront and enables traders to put an absolute cap on their losses and control their risk.

Best turbo warrant trading brokers
Trading Turbos at IG

The lower the price of a turbo warrant, the higher the typical leverage. Greater leverage means that any movement in the underlying price will amplify your profit or loss. Importantly, this means all costs are built into a turbo warrant.

When exiting the same day and avoiding a knock out the full cost will be refunded plus or minus your profits or losses. Some extra charges occur when holding a position over 24 hours but these are billed via small changes to the knock-out level, meaning that traders don’t have to keep adding money to their trading account to maintain a position.

Typically, turbo warrant pricing is lower than regular warrants because the knock-out level in a turbo exposes the holder to additional risk. This means that if the underlying price moves in an adverse direction to the holder’s predetermined strike price the two will expire and no profits will be made.

Example Trade

Below is an example trading scenario…

Pros & Cons

Like any other form of trading, it is important to consider the benefits and risks of your chosen financial instrument.

Pros

Cons

Trading Strategies

Turbo warrants are typically traded on venues with fully available order books so investors can base their thoughts on market trends and plan their strategy. For example, many investors use turbo warrants like options as a cheaper way to hedge against losses. Due to the high leverage of turbos, the hedge is cheaper than buying a regular option.

Also, investors in Turbo24 can use their overnight trading as a neat way to overcome a knock-out. This is because if the turbo is knocked out when the underlying market is closed it doesn’t expire until the market reopens at which point the trader has more time for the market to move in their favour.

How to buy warrants on etrade

How To Get Started

Now you understand all things turbo warrants – we’ve listed the steps to get started trading alongside the pitfalls to avoid:

Choose A Broker

Firstly, you will need to open an account with an online broker. It is important to select a brand you trust, so check their regulatory status, levels of customer support and fees. Reliable brokers that offer turbo warrants include DEGIRO IG, and E*TRADE (for Europeans in specific countries, such as France and Germany).

Analyse The Market

Make sure you have a thorough understanding of how the price of your chosen asset is expected to fluctuate. Trading turbos is speculation, but studying data and trends in the market can strengthen your position.

Select Your Market & Position

If you anticipate the cost of gold to fall choose a short turbo warrant, while if you think the value of Apple stock is set to rise, buy a long turbo.

Choose Your Order & Expiry Type

You can choose from a range of market, limit and stop orders with different expiry options. These will be detailed by your broker.

Decide Your Trade Size

The trade size is the number of turbos that you would like to buy. The size of your position will help to decide the outlay which equates to your maximum loss. Make sure you practise sensible money management.

Decide Your Knock-Out Level

Remember that the closer the knock-out is to the spot price of the underlying asset the higher the leverage of your turbo warrant. This can inflict higher losses.

Monitor Your Position

It is important to watch the market after you’ve bought your turbo warrant. If not, you may miss out on an early exit and incur more losses if you fail to observe contradictory movements. Also be careful when holding your position overnight as this can change your knock-out level.

Exit Your Position

You can manually exit your position to receive profits or limit losses. But if your knock-out level is hit, your position will expire and the turbo warrant will be voided automatically.

Final Thoughts On Trading Turbo Warrants

Turbo warrants can be an excellent addition to a traditional portfolio. Their complexity and risk are compensated for in potentially high returns. Investors should be wary of market movements as leverage creates the possibility for larger losses. However, their built-in knock-out system is a great benefit for any trader because no matter the risk you always know what you stand to lose.

FAQs

How Long Have Turbo Warrants Been Available To Trade?

Turbo warrants have been available across international stock markets for two decades, having first appeared in late 2001. Since then, they have grown in popularity especially across Europe, for example in Germany, half of all derivative trades are turbo warrants.

Can I Go Long Or Short With A Turbo Warrant?

Yes – you can go both long and short when trading turbo warrants. When you think the market is rising, buy a ‘long turbo’, and when you foresee the market falling, buy a ‘short turbo’.

Is My Money Safe When Trading Turbo Warrants?

Turbo warrants are risky products. With that said choosing a regulated and trusted broker can help to ensure your funds and transactions are safeguarded. We also advise thorough research before trading, using a demo account and maintaining sensible attitudes toward money management.

What Markets Can I Trade With Turbo Warrants?

Turbo warrants are available to trade across various markets. These include equities, European indices, currency pairs and commodities like gold.

What Does Down And Out Mean In Turbo Warrants?

Down and out means that the spot price (the price of the underlying asset at purchase) starts above the barrier level/ knock out level and has to decrease in value to be knocked out. So turbo warrants have to move down to be knocked out.