How do bonus certificates work?
When constructing a bonus certificate, the issuer (e.g. Vontobel, Société Générale or HSBC) combines a long position in a call with a strike price of 0 (call strike 0 – this theoretically existing call only represents one share minus its discounted dividend and is in this Form not tradable on a futures exchange) and a long position in a special form of a put option. In contrast to the classic put, this so-called put down and out is equipped with a barrier. If this is violated, this exotic put immediately expires worthless. Due to this restriction, the put down and out is significantly cheaper than the classic put option with an identical strike price.
The base price of the Put Down and Out corresponds to the bonus level of the certificate, its barrier defines the barrier of the bonus certificate. This means that the higher the bonus amount, the smaller the risk buffer, since the issuer only has a certain amount, namely the discounted dividend of the share or the index, to finance the bonus mechanism.
If the share trades above the bonus level on the valuation day, the put down and out has no intrinsic value, so that only the price of the underlying is decisive for the repayment amount of the bonus certificate. This is represented by the value of the Call Strike 0.
If, on the other hand, the base value trades below the base price, around EUR 48, the put down and out has an intrinsic value of EUR 12. This results from the difference between the base price and the actual share closing price (= 60 euros – 48 euros) and of course only exists as long as the barrier is intact.
If the barrier of the put down and out is breached during the observation period, the put immediately expires worthless. Now the repayment amount depends solely on the Call Strike 0, the intrinsic value of which on the valuation day always corresponds exactly to the closing price of the share. Even if the barrier is broken, a positive return is still possible, but investors have to assess individually to what extent a price increase appears likely after the barrier has been broken in the remaining term. For a neutral scenario, the base value must then actually rise to the level of the purchase price of the certificate, for a positive scenario even above that.
Tip: A special feature of the bonus certificate is its high reactivity to share prices that are approaching the still intact barrier of 35 euros – this is especially true shortly before the end of the term. If the share price is around 35.05 euros on the valuation day itself, a small price movement will decide whether investors will get around 35 euros back or the bonus amount of 60 euros.
The closer the share price gets to the barrier, the more likely it will be breached. At the same time, the value of the put down and out is just now – shortly before the still intact barrier – maximum.