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Tuesday, February 23, 2021

Derivatives Idea Analysis - ARKK Yield Earner with Downside Accumulation

by سنشري للاستشارات في Investment Insights

Derivatives Idea Analysis - ARKK Yield Earner...
Derivatives Idea Analysis - ARKK Yield Earner with Downside Accumulation

*This performance is only observed with historical backtests and not traded by the company.

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The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.
Risks & Assumptions
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The structure concept is based on combination of ARKK ETF options buying & selling. Selling of options carries its own risk in the form of negative MTM or stock assignment as the case maybe.
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Option prices and the corresponding pay-off are as of expiry & for representative purpose only. Going ahead, as the ETF moves in either direction, figures for final pay-off will change accordingly.
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The assumption of receipt of initial coupons is based on the option premiums available at the time of structure creation. This may vary at the time of actual execution depending on the corresponding option prices and implied volatility.
Structure Rationale

ARKK Innovation ETF ( $ ARKK) has become a powerful force in the fund management space. The ETF, which primarily invests in companies that are believed to be future technological disruptors in their field, has currently an AUM size of $ 27.20 billion. Some of its major holdings includes Tesla , Roku, Square, Baidu , Teladoc & CRISPR Therapeutics AG. Since January – 2021, ARKK is up by 180 %. Rather than just investing in tech companies, the ETF invests in sectors like healthcare with companies that are niche & likely to bring about major revolutions in their respective fields.

The structure attempts to provide upside participation in the ETF while at the same time allow for buying at lower price should the prices correct towards downside. In traditional yield participation notes, the receipt of coupons is based on coupon barrier as well as KO barrier. With this note, the yields are not subject to any condition with client also getting the opportunity to hold the ETF in long term should the assignment happen. In this way, the client can fully look to participate in the future rally of the ETF.

Structure ARK Innovation ETF Yield Earner with Downside Accumulation
Design The structure consist of 3 ARKK series consecutive contracts available(April'21, May'21,June'21)
Duration 4 Months
View Bullish with accumulation on downside
Legs Each expiry has 1 Bull Call Spread + Put Strike Accumulation ( 85 % Put Sell + 101% ATM Call Buy + 104 % OTM Call Sell). Total Exposure size is 1 Lot –> 100 Units for all legs.
Description

The structure is based on 2 legs - a bull call spread & put sell leg that is used for accumulation. The basic play over here is to capture benefits from both these legs.

Should the share prices hold & even rally above the CMP, the profit is locked owing to bull spread. Over to the put strike, the coupon can be used to enhance the overall return to the existing bull spread. In addition, the client may also look to take the assignment in a scenario where prices drop below the respective put strike

Upon taking the delivery of the ETF in case of assignment, client can look for 100 % participation in upside movement since there is no knock out leg assigned

Coupon This is a net coupon paying structure with total coupons of 7.51 % over the series expiry
Additional Gains The effective lower breakeven point falls with every passing expiry. This in turn makes the structure more lucrative by providing more downside leeway. Above the CMP, the total coupons over the series expiry is 16.05%
Structure Profile

ARKK CMP $ 143.78
Accumulator Strike 85%
Yield Earner Strike 1 101%
Yield Earner Strike 2 104%
Contract Coupon Received Breakeven price ( Above this price profits) Average gains above break even Lower Put Strike Call Spread Strike Effective Buying Price in Case of Assignment or Negative MTM below this price as the case maybe Qty Bought during every downfall
16th April, 2021 1.36% $118.04 4.32% $120 $145-$150 $115.84 100
21st May, 2021 2.64% $116.21 5.59% $120 $145-$150 $113.80 100
18th June, 2021 3.51% $114.65 6.14% $120 $145-$150 $112.65 100
Total 7.51% 16.05% Total ETF Qty Accumulated in downward movement 300

*Data & Price as of 22/02/2021 - US Market Close

Series Payoff

Risks & Assumptions

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The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
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Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
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Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
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The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
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Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
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Unforeseen events can lead to variation in performance from the tested trading strategy.
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The tested result has been computed with price feeds available from Bloomberg.
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The testing environment has not considered transaction or any other costs.
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Trading indicators used for the purpose of testing has been provided by Bloomberg.
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The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg

Arun Leslie John
Chief Market Analyst

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