What is CBBC？
1、 What Are Callable Bull/Bear Contracts?
CBBC are leveraged investment products that allow investors to gain exposure to the performance of an underlying asset with a relatively smaller amount of capital. They are divided into CBBC. Investors who are bullish or bearish on the underlying asset can choose to buy a CBBC accordingly.
2、 How Are CBBC Named?
Using “59063 Tencent SG 98 Call W.C” as an example:
- 59063 — The trading code of the Bull and Bear Certificate on the Stock Exchange.
- Tencent — Indicates that the underlying asset is Tencent Holdings.
- SG — Indicates that the issuer of the Bull and Bear Certificate is Société Générale.
- 98 — Indicates the expiry year and month, August 2019.
- Call — Indicates that this is a Bull Contract.
- W — Indicates that the investment bank has issued multiple Bull and Bear Certificates on the same underlying asset with the same exercise period but different terms (such as the exercise price). Letters are used to distinguish between them.
- C — Indicates a Bull Certificate, while “P” is used for Bear Certificates, representing the English abbreviations for Call and Put.
3、 Difference Between Bull and Bear Certificates and Warrants
- Mandatory Call Event: Bull and Bear Certificates have a mandatory call mechanism. When the underlying asset reaches the call price of the Bull and Bear Certificate, the certificate will be called.
- Lower Sensitivity to Implied Volatility: Due to their deep-in-the-money characteristics, Bull and Bear Certificates are theoretically less affected by implied volatility than warrants.
- Time Value Decay: Their time value generally declines in a more linear manner, meaning that the rate of time value decay does not accelerate as significantly near expiry as it does for warrants.
4、Call Price
Bull and Bear Certificates have a mandatory call mechanism. If the price of the underlying asset reaches the call price before the certificate expires, the certificate will cease trading, be called immediately, and undergo settlement.
Once a Bull or Bear Certificate has been called, it will not resume trading even if the underlying asset subsequently moves back above the call price for a Bull Certificate or below the call price for a Bear Certificate. The call price is determined when the Bull and Bear Certificate is listed and is generally displayed on the quote platform and in the product terms.
5、 Exercise Price
If a Bull or Bear Certificate is held until maturity without being called, investors are conceptually entitled to buy the underlying asset at the exercise price for a Bull Certificate or sell the underlying asset at the exercise price for a Bear Certificate. In practice, Bull and Bear Certificates are cash-settled, with the settlement amount paid back to investors.
The exercise price is determined when the Bull and Bear Certificate is listed and is generally displayed on the quote platform and in the product terms.
For Bull Certificates traded on the exchange, the call price and exercise price cannot be higher than the current price of the underlying asset. For Bear Certificates, the call price and exercise price cannot be lower than the current price of the underlying asset, as such out-of-the-money Bull and Bear Certificates should already have been called. In theory, all Bull and Bear Certificates traded on the exchange are therefore “in the money.”
6、 Residual Value
Bull and Bear Certificates are classified into two categories based on their residual value:
- N Class — No residual value.
- R Class — May have residual value. Currently, all listed Bull and Bear Certificates are R Class.
7、 How Is the Residual Value of an R Class Bull or Bear Certificate Calculated After a Mandatory Call?
Amount recoverable by a Bull Certificate investor:
(Lowest price of the underlying asset − Bull Certificate exercise price) / Conversion Ratio
Amount recoverable by a Bear Certificate investor:
(Bear Certificate exercise price − Highest price of the underlying asset) / Conversion Ratio
8、 Can a Mandatory Call Event (MCE) Be Triggered During the Closing Auction Session?
Yes. If the price of the underlying asset reaches the call price at the end of the Closing Auction Session, the Bull or Bear Certificate will also be called, resulting in a Mandatory Call Event (MCE).
9、 Six Steps to Selecting a Bull or Bear Certificate
Step 1: Choose the Type of Bull or Bear Certificate
To select a suitable Bull or Bear Certificate, investors should first form a view on the future direction of the underlying asset. If an investor expects the underlying asset to rise, they may consider a Bull Certificate; if they expect it to fall, they may consider a Bear Certificate.
Step 2: Pay Attention to the Call Price
As Bull and Bear Certificates have a mandatory call mechanism, investors should consider an appropriate safety margin based on their view of the underlying asset and carefully select the call price.
Step 3: Leverage Ratio and Exercise Price
When the current price of the underlying asset is closer to the exercise price of the Bull or Bear Certificate, its leverage ratio is generally higher, resulting in greater price volatility. When the underlying asset is further away from the Bull Certificate's exercise price, its leverage ratio generally decreases.
As for the call price, when the underlying asset moves closer to the call price, the risk of the certificate being called increases. Therefore, the theoretical leverage of the Bull or Bear Certificate may also increase to reflect the associated call risk.
Investors should note that highly leveraged Bull and Bear Certificates are generally more suitable for investors who have a higher risk tolerance and relevant investment experience.
Step 4: Conversion Ratio
Assuming all other factors remain unchanged, the higher the conversion ratio of a Bull or Bear Certificate, the lower the amount of capital required to invest in the certificate, while the profit amount earned is proportional to the capital invested.
Step 5: Compare Financing Costs
Different issuers may use different formulas when issuing Bull and Bear Certificates. In addition, issuers may have different hedging advantages for different underlying assets. Therefore, even Bull and Bear Certificates with similar terms may have different financing costs.
Financing costs may also change due to market supply and demand. Investors should regularly monitor the financing costs of their Bull and Bear Certificates and consider switching to certificates with lower financing costs.
Step 6: Compare Issuers
When market liquidity is limited, the issuer may be the only liquidity provider for a Bull or Bear Certificate. The efficiency of the issuer's pricing system can therefore directly affect the certificate's price.
The issuer's conduct, financial strength, credit rating, and other factors are among the considerations for investors.
