Callable Bull / Bear Contracts?

A callable bull/bear contract (CBBC) is one of the popular investment tools in markets. Just like warrants, CBBCs are issued with a strike or exercise price, an expiration date, a conversion ratio and other similar terms. The financial cost of the CBBC can be compared to the cost of the participant borrowing money from the issuer to buy/sell the relevant assets and gain leverage. An investor who is bullish on a market buys a Callable Bull to capture its potential rise in value. On the other hand, someone who is bearish takes on a bear contract to profit from a falling market. Hence the price of a CBBC can be compared to the cost of borrowing from the leveraged instrument’s issuer to buy or sell the underlying asset.

CBBCs involves a mandatory call mechanism whereby the contracts are withdrawn from trading before expiry if the price of the underlying asset hits the “call price” or “trigger point.” (For Callable Bulls, the trigger is equal to or higher than the strike price; for bear contracts, it is equal to or below.) When that happens, the investor may lose as much as the total amount invested in such CBBCs.


Call Price

CBBCs involves a call mechanism. If the Call Price is reached before expiry, the CBBC will expire early and the trading of that CBBC will be terminated immediately. Trading stops and the settlement process starts.

The closer a CBBC approaches the expiry date, the more volatile its theoretical price will be.
If the settlement price is determined to be equal to or less than the strike price, no residual payment will be paid out. Call Price is fixed at issuance, you can refer the quote system and terms and conditions.

Strike Price

If the CBBC do not have a mandatory call before the expiry date, investors may buy/sell on the market freely. In the actual CBBC transaction, the amount will be returned to the participant after settlement in cash. The call event will be happened if the call price and strike price of Callable Bull are higher than the current price of the underlying asset and the call price and strike price of Bear contracts are lower than the current price of the underlying asset. In theory, all CBBCs that are exercised are “in-the-money.”

Funding Cost

Issues a CBBC from issuer is similar to the provision of Margin Financing or Stock Borrowing & Lending service. The issuer is required to collect funding cost. For administrative reasons, the issuer cannot collect the funding cost from the clients daily. Therefore, the amount has been prepaid and reflected in the trading price. When clients buy the CBBC from the issuer, the charge is included in the CBBC. If clients withdraw the CBBC before the expiration date, part of the pre-paid financial charges can be retrieved from the issuer’s purchase price. The funding cost of the Bear contract include the borrowing costs of the issuer, so the financial expenses of the Bear contract are generally higher.

Conversion Ratio

The conversion ratio is mainly 1, 10 or 100. The ratio varies greatly, ranging from thousands to tens thousands. The ratio has an impact on the face value of the CBBCs and the market beating, but it does not affect its theoretical price changes. The smaller of the ratio will be larger the face value of the CBBCs, the price jumps between the same price zones will be faster.


The issuer buys/buys a CBBC, it is required for them to buy/sell few shares of the relevant assets during the hedging. Many participants think that the hedging value of the CBBCs is about 1. However, the hedging value of the CBBCs was affected by the dividend payouts and dividend payout ratio of the relevant assets before the maturity date of the CBBCs. The hedge value can range from 0.6. to 1.4.

The farther the difference between the price of the underlying asset and the call price, the lower the leverage; the longer the tenor of a CBBC, the lower the leverage. It is because the relevant assets are paid before the maturity, it will increase the expected value of the bear contract being exercised, and at the same time reduce the expected value of the Callable Bull when it is exercised.

In addition, the hedge value will be changed during the change of the relevant asset price. The farther the relevant asset price is far away from the CBBC exercise price, the hedge value will be closer to 1. The closer the price of the relevant asset is reached to the call price, the hedge value will be more fluctuated. Therefore, participants should review the data of the hedge value and adjust the investment strategy according to market changes.

Maturity Date

Since the financial cost of the CBBCs decreased linearly, you did not need to pay attention to the relationship between the maturity date of the CBBCs and the decrease in financial cost. The situation is different from the short-term warrants. Unless you consider holding the CBBC for a longer period, you generally do not need to focus on the maturity date of the CBBC. For long-term CBBCs, you are required to pay higher funding cost or reduce the hedge ratio of the CBBCs.


Since the trading of CBBCs does not involve an over-the-counter option hedging, the outstanding has less impact on the price performance of the CBBCs. However, once the participants choose to buy/sell a large amount of CBBCs at the same time, there is an opportunity for the CBBCs to deviate from the theoretical price in a short period of time.


Premium is the rise or fall price of the relevant CBBCs when they purchase so that the participants can break even. The premium can act as the actual value of the financial costs of the CBBCs which charged by the issuer. If the CMMC is mandatory called, even the call price is the same with different maturity dates, the participants holding a lower premium CBBC will lose less on the funding cost than those who purchase the higher premium. However, if the participant has a CBBC in the deep-in-the-money option for a long time, it suggests comparing the annual cost of the CBBC for similar terms.

Gearing Ratio

Since the hedging value of the CBBCs is quite close to one, it is not necessary to add the parameters of the hedge value when calculating the actual gearing as in the case of a warrant. The Gearing ratio is equivalent to its actual leverage. The Gearing ratio of the CBBCs and the related assets rise and fall is reverse. If a Callable Bull rises due to the increase in the price of the underlying asset, the Gearing ratio will decrease; If the Callable Bull declines due to the falling of the price of the HSI related assets, the gearing ratio will increase. Therefore, if the participants look in the wrong direction, they need to check whether the gearing ratio will become too high. If they exceed their own risk level, the participants should consider changing with a lower leveraged CBBC. For middle term participants, you may consider switching to a higher leveraged CBBC to maintain the original gearing ratio.


The Settlement is the closing price of last trading day which is difference from the warrant expiry date (The 4th trading day preceding the expiry day.)

Callable Bull cash settlement amount = (Settlement price of the underlying asset – Exercise price of the warrant)/ Conversion Ratio

Bear Contracts cash settlement amount = (Exercise price of the warrant – settlement price of the underlying asset)/ Conversion Ratio