Issuer defined labels for certain product features are not well known to even seasoned structured product investors and their advisors. Case in point, the One Star feature is not well described outside of its niche usage. It is, however, an interesting enhancement to certain notes containing a diversified basket of assets. 

When a note has more than one underlying asset included in its basket, a One Star feature can be made available. A ‘One Star’ label on a product denotes a specific condition that applies only at maturity. It can act as a type of fail-safe for products that have at least one underlying that broke the terms of the protection barrier. 

To start with, assume a simple Autocall note has three underlings: 1) the Russell 2000 Index ETF (IWM), 2) Morgan Stanley (MS) and 3) UnitedHealth Group (UNH) and comes with a 60% European Protection Barrier. Now, assume that the note never autocalls because UnitedHealth Group immediately started falling after the note was issued. In fact, just for illustration purposes, assume that at maturity UNH stock price is only 30% of what the initial strike price was when the note was issued. Under normal circumstances, this scenario would cause a 70% loss on principal invested. However, with a One Star feature this may not be the case. 

One Star features always include a level – usually at or just above 100% – of the initial strike price. The lower the level the better, as that is the hurdle for the One Star effect to take effect. 

Now, assume that the simple Autocall note above has a 100% One Star clause attached to it. This could potentially change the outcome of the note completely. A 100% One Star only requires that one underlying closes at or above its  initial strike on maturity to save the entire principal of the note.  In this case, if either IWM or MS closed on maturity at or above their initial strike prices, 100% of the principal invested would be returned. This would save the note from a 70% loss. 

One Star features usually work best when uncorrelated individual assets are included in baskets of underlyings for structured products. In fact, when more assets are included in baskets, this can increase the chance of the One Star playing a role in the outcome of the note. 

Remember, issuer defined labels such as One Star features can play an important role in determining the final outcome of a structured product. It’s not only important to understand the terminology, but also how and when these features play a strong role in determining the probability of a positive outcome for an investment in structured products.