Part 4: A Built-in Airbag to Limit Losses

Our Short & Leveraged Single-Stock ETPs could be challenging for some investors looking for new innovative products to add to their portfolio. In this six-part educational series, we describe the idea behind our products, their construction, features and their benefits to investors as well as when compared to other similar-seeming products.

Contents

Scenario 1: “Skid”
Scenario 2: “V-shaped Rebound”
“Airbag Mechanism” Performance Explained

Leverage Shares ETPs come with a variety of leverage factors – offering amplified returns with a simple trade. As we know, however, there’s no such thing as a free lunch: using additional exposure is coupled with taking on additional risk. Capturing the trend could prove lucrative but mistiming the move could magnify losses in the blink of an eye.

In theory, a 3x leveraged product could become worthless if the underlying stock lost more than 1/3rd of its value during the trading day.

This is why Leverage Shares ETPs come equipped with an “airbag mechanism” built into the methodology of the indices they track and into the administration of every product so they can replicate it as best as possible. This feature is triggered when the underlying stock loses more than x% (in leveraged indices) or appreciates by more than x% (in short indices) during a trading session compared to previous day’s close. Trading is then halted while prices are recalculated tick-by-tick for a short period of time (about 10-15 minutes). The recalculation is done using the prices of the underlying shares over this time. Trading then resumes as if it is a brand-new trading day.

The respective trigger values for most (but not all) of the Leverage Shares ETPs are:

Leverage Factor	Trigger Value (x)
2¹	-25%
3	-16.67%
-1	50%

This feature has unique characteristics, depending on the scenario.

Scenario 1: “Skid”

Let’s consider a hypothetical stock traded in NYSE with a previous day close of $350 and an initial 3x ETP set at $100. In this scenario, the stock experiences a decline in price during the day and finishes 32.67% down from its previous close. A 3x ETP without the “airbag mechanism” would haemorrhage in value and be close to wiped out, losing a theoretical 32.67% x 3 = 98% of its value.

However, with the “airbag mechanism” enabled, the ETP is rebased at 11:30 (assuming the underlying stock had fallen 16.67% by 11:15) and the 3x ETP is reset and the rest of the session treated as a brand-new day. There is another reset at 13:30 (when the stock decreases another 16.67% relative to the price at first reset) and the 3x ETP is reset once again. The third reset happens at 16:00 and the 3x ETP is reset again. As a result of the intraday rebalances, the 3x ETP is down only 68% by the end of the day. This ‘intraday rebalance’ can occur multiple times throughout the trading day (i.e. every time the underlying drops by 16.67%).

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Scenario 2: “V-shaped Rebound”

Once again, let’s consider a hypothetical stock with a previous day close of $350 and an initial 3x ETP set at $100.

In this scenario, the stock has a steady decline down to the 16.67% threshold by 11:30, which triggers the reset. Following the rebalance, however, the underlying stock gradually climbs back and actually closes +0.5% for the day. This means that a 3x ETP with a starting value of $100 without the “airbag mechanism” would have added 1.5% in value.

Following the intraday rebalance, the rest of the trading session after 11:30 is treated as a brand-new day, the 3x ETP is down 23% by the end of the day.

“Airbag Mechanism” Performance Explained

When the feature is triggered, the end-of-day effects can be summarised as follows:

If the underlying stock moves up after the intraday rebalance, the ETP may make less than the expected gains of a leveraged ETP without an “airbag”.
If, however, the underlying stock keeps moving down after the rebalance is triggered, the ETP may lose less more than a leveraged ETP without an “airbag”. If the stock decline is severe, the “airbag” may prevent the ETP from crashing intraday and becoming worthless.

The performance drag of the leveraged ETP “airbag” following an intraday rebalance is essentially the insurance incurred by the investor to prevent potentially devastating losses. This insurance stays activated during the NYSE’s market hours.

It also bears noting that while all stocks have intraday directional volatility, the magnitude of the movement required to trigger the “airbag mechanism” is quite substantial. Also, the portfolio manager for the Leverage Shares ETP will trade the underlying stock during the rebalance period with a view to replicate the index rebalance as close as possible. However, since the resulting index value is a theoretical calculation using prices observed only ex-post, the Leverage Shares ETP will not perfectly replicate the index rebalance.

Investors in leveraged ETPs should be aware of the risks involved, as the leverage amplifies the price movements in the underlying shares.

¹For the following underlying stocks, the 2x Leverage Shares ETP have a trigger of -20% as per the index provider’s guidelines: Microsoft, Facebook, Visa, Apple , Salesforce.com, Netflix, Amazon, Citigroup, Goldman Sachs, JPMorgan, Alphabet and NVIDIA.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.