Financial Idiot 005 - How to leverage like an idiot?

This Blog Post was originally distributed by the Newsletter "Financial Idiot". You can find and subscribe to it here.
DISCLAIMER: I'm an idiot and this isn't financial advice! You can lose money when investing, and you should never invest money you don't own or you can't afford to lose. I'm not responsible for your decisions!

Or, as an alternative title: How to turn 100€ into 0,10€. Yes, you read that correctly. Welcome to a new Issue of "Financial Idiot", this time co-authored with a good friend of mine.

Wait, what is leverage?

With leverage, you can buy or sell (more on that later) more of a specific share (for example, TSLA) than you can afford. For instance, with a 5x Long (= buy) leverage on TSLA, you can buy Tesla shares for only 20% of the original price (173,13USD instead of 865,65 USD per share). Many investors use the Turbo KO (Turbo Certificates with Knock Out) to use this effect.

What is a Turbo KO?

With a Turbo KO, you are betting against the issuer of the Turbo KO. For example, you think the RBI (Raiffeisenbank International) share price will decrease because of their exposure in Russia and Ukraine. If the price goes down by 20%, you make 5x what you would have made if you "sold" (-> shorted -> selling shares you don't have and re-buy the shares after the price dropped to fill the order) one RBI share. So you can buy Turbos that profit from the course going down with a particular lever (ex. 5x).

Of course, the issuer isn't an idiot, and thus there is a pitfall. If the share price goes upward (instead of the downward you expected), there is a limit when the Turbo Knocks out, hence the name. If you hit the Knock Out barrier, the bet is lost. And so you lose all your money (or turn 100€ into 0,10€).

As you can see, just like in a casino, the bank always wins. Whenever the price moves against the Turbo KO issuer direction, they can move the KO barrier upwards. And as I've said, every touch of the barrier knocks the Turbo out.

With Turbos, you can leverage in both directions (long & short), and there are several more factors: for example, you can have turbos with a specific end date, or you can have them with stop-loss (meaning you don't lose all your money when the price moves near the knock out).

As I always say, this isn't financial advice, and I don't fully understand Turbo KOs myself, but I find them an exciting way to gamble with the market. Now let's have a look at how idiotic I lost a few bucks along the learning curve:

I shorted the RBI Symbol on 03.03.2022 and bought 100 pieces for a limit price of 1,20€. Sadly there aren't any past performance/product charts on the ISIN (DE000SH3K8L6), as it seems like as soon as the Turbo is Knocked Out, they are removed. So I can't remember the leverage I used or the Knock-Out Barrier.
So including the Order cost of 1,90€, a total Order sum of 121,90€. After executing the buy order, I immediately placed a sell order for the same 100 pieces at 2€ per piece (I would have made 76,20€ before taxes; order costs already removed).

But RBI recovered, and so I got knocked out. After getting knocked out, every option you bought dumped to 0,001€ per piece, which turned my 121,90€ into 0,10€. Almost as good as buying a lottery ticket that doesn't win.

What do we learn from that? If you want to, you can definitely play casino on the stock market, and if you think a share will go down, you can bet on that, but will it go down? Also, if you short something (bet on the price going down), you might be confronted with a mass of people over on r/wallstreetbets (see Wikipedia).

But never less, it was a fun experiment, and as soon as I have some spare money again, I might gamble a few euros again. A guy on the German pendant of r/wallstreetbets, r/mauerstrassenwetten, made a small fortune with an option on Rheinmetall in which he invested just before Russia invaded Ukraine. You can find that post here.

As always, watch out and DYOR (do your own research)!

I hope you enjoyed this issue of Financial Idiot, I know the last couple were a little bit shorter (I want to target a 7 minute reading time), but I will try to bring lengthier topics in the future. Be sure not to miss the next issue coming out in two weeks: "Why would you need a budget? "

PS: Another great title I thought about: "How to get rich fast, not".

Subscribe to Philipp Haidenbauer | Blog

Don’t miss out on the latest issues. Sign up now to get access to the library of members-only issues.