What is a Super Upside Note?
A super upside note - SUN describes an investment in which a person who already is long in a stock leverages this position to buy additional shares of the same equity.
This type of positioning increases concentration risk. When the trade works, a super upside note increases the trader’s gain. When it doesn’t work, however, it magnifies losses.
For this reason, a super upside note isn’t for everyone. Even for experienced traders, it’s important to limit position sizes and the amount of leverage used when considering such a strategy.
Understanding Super Upside Notes (SUN)
A super upside note - SUN is not a common trade. It’s generally used only by professionals or highly experienced traders in situations where they have extreme confidence. This type of confidence typically spurs from a combination of supply-demand technical factors, as well as fundamental research that appear favorable, and is likely to result in what the traders believe is either predictable upside or downside.
Say a trader already owns shares in Magda Electronics, and is carefully watching a symmetrical triangle pattern in the company’s stock. In the recent past, however, Magda shares gained strongly, and the trader thinks the existence of the triangle indicates an eventual breakout to the upside.
Moreover, based on the trader’s knowledge of Magda’s products, this trader believes Magda is the only company in the running for a specific large contract with the U.S. Department of Defense, which the department just announced today for bid.
After carefully weighing the risks and rewards of the situation, the trader may borrow against the existing Magda stake to purchase more shares. To do so, the trader will pay margin fees, and will be subject to a potential margin call, should the trade go awry.
Why This Type of Trade is Uncommon
Nothing is predictable in the markets. Depending on the amount of leverage used, a super upside note can turn disastrous. Experienced traders tend to set rules regarding how much leverage they are willing to use when executing a super upside note, and tend to stick to those rules in all situations.
Many traders will execute a super upside note with a stop-loss underneath an area of price support, in an effort to limit the damage should the trade go wrong.
Even if the trade does go the right way, traders must be careful not to get to greedy, and set appropriate price targets. Ideally, this involves setting a first target, at which the trader exits a part of the trade to take early profits and pay all trading fees. The trader may then use technical risk-reward ratios, set a stop on the remaining position, then allow the trade to continue to the next major area of technical resistance.