Societe Generale further expanded its range of investment products, listing on the SeDeX segment of Borsa Italiana 60 new Discount type certificateswith a focus on the big names in Piazza Affari.
In particular, the new certificates have expiring on 21 December 2023 (just under 1 year) and as underlying it is possible to choose from ten stocks belonging to the Milan Ftse Mib index: Banco Bpm, Enel, Eni, Ferrari, Intesa Sanpaolo, Leonardo, Stellantis, Stmicroelectronics, Tenaris and UniCredit.
A Discount Certificate against market volatility
Discount Certificates are classified by Acepi as unprotected capital certificates and allow the investor to be exposed on a linear basis to the performance of the underlying stock, however starting from a price lower than its current market price (at a “discount”). On the other hand, participation in the upside is limited by the presence of a certain pre-set maximum level, he Cape.
Having purchased the certificate at a lower price than the market priceit will therefore be possible to obtain a profit even if the performance of the underlying should be negative.
This type of instrument does not include early exercise options, capital protection barriers and the payment of periodic premiums. In practice, they are certificates that allow you to bet on an increase in the underlying share up to a certain level, thus guaranteeing a downward margin in the event of a negative stock performance underlying, thanks to the “discount” in the purchase price.
Furthermore, based on the Cap chosen in the product range, it is possible to express a more or less bullish view on the underlying: the higher the Cap, the greater the possibility of benefiting from the rise in the underlying, however the lower the discount on the purchase price. The closer the cap is, the greater the discount will be, on the other hand, the performances will be limited sooner.
This is how Discount certificates give their best during phases of indecision or a slight drop in market prices, thus representing an attractive alternative to direct investment in shares.
A Covered Call in a single instrument
The strategy behind a Discount Certificate recalls the functioning mechanism of the most famous options strategy, known as Covered Call. Basically this strategy allows the investor to simultaneously buy an underlying security and sell a call option on the same security, thus immediately collecting the premium which reduces the monetary outlay of the investment.
Hence, going to replicate this strategy on single shares could be complicated, but thanks to the Discount type certificates these operations become accessible, as they allow investors to buy a covered call strategy all in a single securitized package.
An example, the Discount Certificate on Eni: functioning and repayment on expiry
To better understand how this type of product works, let’s take an example:
Let’s take as an example the Eni titlewhose current market price is €14.3 per share. By purchasing a Discount Certificate with underlying Eni and Postal Code placed below the current level at €12.50 (ISIN DE000SQ8HPS7), we get a gross discount of 19.7% given the purchase price of the certificate at €11.48.
When the certificate expires, different scenarios can be outlined. For example:
- In case the Eni shares rise to €15.73 (+10% compared to the current level), since the cap on the certificate is set at €12.50, a certificate liquidation amount equal to the cap (€12.50) will be paid and consequently the profit made with the certificate will be equal to 8.89% gross (€12.50 refunded against a purchase of €11.48). In this case we note that even in the event of sustained increases in the underlying security, the Discount Certificate will give a maximum of 8.89%, without returning further profits to the investor.
- In case the Eni shares fall to €12.87 (-10% compared to the current level), the investor will also in this case receive the cap of €12.50, realizing a gross return of 8.89%.
As we have seen in both scenarios, the Discount Certificate on Eni allows, thanks to the discount applied during the issue phase, to protect its capital even in the event of a negative performance of the underlying security. - If instead the Eni stock falls to €10.01 (-30% compared to the current level), the refund amount will be €10.01 being positioned under the cap. The return achieved in this case will be negative and equal to -12.80% (given the purchase of the certificate at €11.48), but will however be greater than the drop suffered by the security (-30%).
Basically, thanks to the functioning mechanism of the Discount Certificates, buying at a discount allows: in the event of an increase, to obtain a return up to the maximum amount (hypothesis 1) and, in the event of a decrease, to contain the losses or even make a profit if the descent is limited within the purchase price of the certificate (hypotheses 2 and 3).
Société Générale, for this issue, makes available different discount levels (from 4.49% to 31.93% gross)which vary according to the underlying and the chosen cap.
