Snowball structure product can be regarded as an exotic option, which is popular in the domestic OTC option market in recent years. Its core mechanism includes investors selling put options with trigger conditions to securities companies. This option structure aims to provide investors with a certain degree of downside protection, while expressing the view that the market is "moderately bullish". As long as the price of the underlying assets always fluctuates within a specific range, the longer the investor holds it, the greater its potential profit.
This process is like snowballing. As long as there is no big fluctuation in the market route, the snowball will gradually become bigger. Therefore, this option product was named "Snowball".
Nowadays, snowball structure products have been widely used, including asset management of securities companies and bank wealth management products. In the asset management products of securities firms, most of them adopt the standard snowball structure, which provides investors with a relatively complex but attractive way to participate in the market.
To sum up, we can sum up several essences of snowball option:
-Put option with barrier price.
-Provide some downside protection when bullish.
-With path dependence.
-coupon is formed by market makers buying low and selling high.
-It is a kind of fixed income product, which is suitable for markets with small fluctuations as well as markets with large fluctuations.
Basic introduction of snowball products
The design of snowball products includes knock-in and knock-out prices. Investors buy snowball structure, which is actually equivalent to selling exotic put options and making profits by obtaining option fees. Under normal circumstances, the duration of snowball products is about half a year or even longer. If it is eliminated on the observation day, the product will be terminated early.
Technical terms:
Observation day: the trading day used to judge whether the knock-in or knock-out behavior occurs.
Closing observation day: usually the last trading day of each month.
Approach observation day: every trading day may become an approach observation day.
Bidding price: generally, it is the price of the target at the time of buying (stock index/stock) multiplied by103%;
Buying price: usually the price of the subject matter (stock index/stock) multiplied by 80% at the time of buying;
Knockout: On the knock-out observation day, if the stock index price is higher than the knock-out price, the knock-out condition will be triggered.
Knock-in: On the knock-in observation day, if the stock index price is lower than the knock-in price, the knock-in condition will be triggered.
Structural characteristics of snowball option;
1. Automatic knock-in and knock-out structure: At the same time, the target is bullish, providing a certain degree of downside protection.
2. Upward knockout mechanism: observation during the duration. If the observed daily target price exceeds the agreed level, the product will be terminated in advance and the proceeds will be paid.
3. Knock-down mechanism: observed daily during the duration, if the underlying price falls to the agreed level, the customer may bear the loss due, and the loss is equal to the decline of the stock due.
Applicable scenarios of snowball structure:
-It is suitable for investors to think that the target has limited falling space and support level, and hope to gain profits by correctly judging the support level. Suitable for market scenarios of rising, slow cattle, consolidation or moderate decline.
-With the decline in the yield of market wealth management products, it is suitable for investors who can bear the loss of principal under certain scenarios. This product aims to provide annualized expected income with market competitiveness.