The DOTS: episode 5
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The first four episodes explore various products in the DOTS range. Let’s now look at how an investor or speculator might use them.
Short recap
DOTS products are financial products dreamed up by their creators. These individuals are the real market-makers for this type of instrument. Call and put options form part of the arsenal of products traded simply on the stock market (e.g. CBOE, SIX). These options offer profitable combinations for those looking to play with the upward and downward movement of underlyings, as well as those looking to safeguard their portfolios.
Unlike options, DOTS products can be considered to be structured products because they involve significant barriers or leverage. Furthermore, they can only be traded with their issuers.
The various types of DOTS products
The Swissquote platform offers four Swiss DOTS products: warrants, knock-out warrants, mini-futures and factor certificates. Warrants represent over half of the products on the platform, with over 55’000 on offer compared to only 1’500 factor certificates. But the important thing isn’t the number — it’s how you use them.
DOTS products may all be different, but they have one key feature in common: buyers can only lose what they put in. This is critical because, when dealing in futures and even some options strategies, you can lose a significant amount.
What’s more, the buyer can play with the upward and downward movements of the underlying by making a relatively low initial investment. The various Swissquote webinars discuss this aspect and explain the differencesbetween purchasing an underlying and a DOTS product in a variety of scenarios.
DOTS products for investors
Investors generally tend to focus on equities and bonds when building a portfolio. The amounts invested are relatively large and the downside risks depend on the investor’s profile.
Investors have a number of products available to them to manage market fluctuations. DOTS products can be used as a strategy to hedge currency risk or losses on a specific underlying.
However, investors can also purchase DOTS products to acquire a specific underlying, such as a non-core commodity in the portfolio. If those same investors wanted to diversify their assets and purchase several underlyings, they would have to either invest a hefty sum to implement the strategy or purchase several DOTS products for a smaller amount.
Sometimes a slump in equities just means playing the waiting game (until they pick back up again), but most DOTS products have barriers which, if passed, cause the product to expire. This causes the position(s) to disappear from the portfolio. But you can reestablish these positions by purchasing other DOTS products at the new strike price.
DOTS products for speculators
Thrill-seekers and those looking to dabble in trading can use DOTS products to carry out transactions. With the implied volatility of some underlying products, it would be a shame to let such an adrenalin rush pass you by.
Historically, investors bought securities to hold for an average of three to five years. Speculators have a more short-term vision, ranging from a minute to a week. If you are a speculator, DOTS products can satisfy your desire to trade on the financial markets.
Factor Certificates, which are recommended for day trading, are the best choice for the most active speculators. Of course, there can’t be a DOTS product for everything. Speculators first need to make sure a product exists for their chosen underlying. As such, it is advisable to make a list of several underlyings that are represented by a warrant, knock-out warrant, mini-future or factor certificate.
Some final words of advice
Only invest what you are prepared to lose. You have probably heard this before, but it’s sound advice. The brightest minds in finance always recommend checking to see how healthy a company is before buying equities or bonds. In other words, doing your research is critical.
It is strongly recommended that you read the product description, or spec sheet, prior to investing in DOTS products. The spec sheet will tell you the strike price, product maturity, knock-out threshold and leverage.
As Warren Buffet once said: “Risk comes from not knowing what you’re doing”.
DISCLAIMER
The content of this article (including market commentary, market data and observations) is not a work product of any research department of Swissquote or its affiliates. This material is intended to highlight market action and does not constitute investment, legal or tax advice.
Swissquote makes no representation or warranty as to the quality, completeness, accuracy, comprehensiveness or non-infringement of such content. The views expressed are those of the consultant and are provided for educational purposes only. Any information provided relating to a product or market should not be construed as recommending an investment strategy or transaction. Past performance is not a guarantee of future results.
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Products and services of Swissquote are only intended for those permitted to receive them under local law.
All investments carry a degree of risk.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74–89 % of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Digital Assets are unregulated in most countries and consumer protection rules may not apply. As highly volatile speculative investments, Digital Assets are not suitable for investors without a high risk tolerance. Make sure you understand each Digital Asset before you trade.
