What is callable bull/bear con (CBBC)
The callable bull/bear contract (CBBC) is a leveraged financial derivative that has two types of contracts - bull and bear. If an investor anticipates the underlying asset's price to go up, she/he can invest in a callable bull contract so that when it goes up, the market price of the bull contract will go up; if an investor anticipates the underlying asset's price to go down, she/he can invest in a callable bear contract so that when it goes down, the market price of the bear contract will go up. The strike price, call price and maturity date are set upon the issuing of CBBC. Once the underlying asset’s price reaches the call price, CBBC will be called and trading will be terminated immediately.
Strike price & maturity date:CBBC is essentially a special kind of option. The intrinsic value of bull contracts is (last price - strike price)/entitlement ratio. The intrinsic value of bear contracts is (strike price - last price)/entitlement ratio. The expiry of CBBC issued by Gate.io falls at a certain HKT time on the maturity date. If a CBBC does not trigger a mandatory call event and reaches maturity, settlement will be calculated and returned to the investor. The settlement sum for a bull contract is (settlement price - strike price)/entitlement ratio and the settlement sum for a bear contract is (strike price - settlement price)/entitlement ratio.
Ratio: Entitlement ratio refers to the number of CBBCs can be purchased in exchange for 1 unit of the underlying asset. For example, 10000 callable bull/bear contracts with an entitlement ratio of 10000:1 are worth 1 unit of the underlying asset.
Gearing ratio: The gearing ratio roughly reflects the leverage that you can obtain when investing in CBBC. The calculation formula: gearing ratio = last price of the underlying asset's spot index/(last price of CBBC * entitlement ratio). Please note that the gearing ratio of a given CBBC changes constantly as the market condition changes.
Price of CBBC: The price of CBBC = intrinsic value + issuer's financing cost.
Intrinsic value of callable bull contracts = (spot index - strike price)/entitlement ratio. Intrinsic value of callable bear contracts = (strike price - spot index)/entitlement ratio Financing cost generated from issuing CBBC = strike price * annualized financial rate * until maturity date count
Call price:CBBC has a mandatory call mechanism. When the price of the underlying asset reaches the call price, the contract will be forcedly exercised. Called bull/bear contracts cannot trade anymore and will enter observation period. If you do not want your CBBC to be called, please sell your holdings before the price reaches the call price.
Settlement after MCE (Mandatory Call Event): A mandatory call event will take place when the price of the underlying asset reaches the call price. CBBC will enter observation period after getting called. In this period, the settlement price will be determined according to the price trend. The settlement price is the lowest (for callable bull contracts) or highest (for callable bear contracts) recorded price of the underlying asset during the observation period.
High leverage, up to 100-200 times (under certain circumstances). Spot trading, no margin required. Invest in bull contracts if you are expecting an upward trend in the underlying asset's price, bear contracts if you are expecting a downward trend. Lower handling fees compared with the spot and contract trading, because CBBC handling fees are charged on the trading principal, which is not amplified by leverage. Mandatory call mechanism. Settlement price is determined according to the price trend of the underlying asset within the observation period (4 hours after the call is triggered). The remaining holdings of the investor may or may not have residual value.
Compared with leveraged ETF products:
Higher leverage. No management fee (annualized financial rate is 7.3%). No irregular rebalancing mechanism, thus no frictional expenses due to position adjustment. Mandatory call mechanism, once triggered, may make investors lose a considerable sum of principal. In extreme cases, all principal may be lost.