What Is a Callable Bull/Bear Contract (CBBC)?

The Callable Bull or Bear Contract (CBBC) is a financial instrument with a leverage effect that monitors the performance of an underlying asset. In CBBC, after tracking the underlying asset, the investor can own the actual asset without paying the total price value of such assets.

In the Callable bull/bear contract, you can buy the bull contract or the bear contract. Buying the bull contract implies that the investor has taken a bullish position on the underlying asset and is entitled to the profit when the value of that asset rises. Meanwhile, buying the Bear contract indicates that the investor has taken or is willing to take a bearish position and will receive profit from the drop in the value of such underlying asset.

What Is a Callable Bull/Bear Contract (CBBC)?

The Callable Bull/Bear Contracts (CBBCs) are derivative financial instruments that render leveraged investment opportunities in underlying assets to investors. An investor might choose either a bull or bear contract from third-party organizations. In most cases, the Callable bull or bear contracts are issued by investment banks.

In 2001, the first CBBC financial instrument was introduced in Europe and Australia. Today, this leveraged investment opportunity is widely used in the United Kingdom, Germany, Italy, Switzerland, Hong Kong, and many other countries.

In Callable Bull or Bear Contracts, the investment banks or third-party financial institutions will track the performance of the underlying assets and then make it available for investors without paying the total price required to own the tangible assets. Once an investor takes a bullish or bearish position, the contracts are issued within three months (minimum) to five years (maximum).

During this issuance period, there is an agreement between the investment bank and the investor that the former will call the latter when the price value of the underlying asset reaches a Call Price. The agreement also includes that if the Call price for the underlying asset is reached before expiry, the CBBC will expire, and the trading will be halted immediately.

How Does Callable Bull/Bear Contract Work?

Whether an investor chooses a bull or bear contract, the CBBC will be issued at a price representing the difference between the spot price of the underlying assets, the contract’s strike price, and the funding costs.

Specifically, if you sign the bull contracts, the call price can equal or exceed the strike price. However, for the bear contracts, the call price can be lower than or equal to the strike price. In calculating the profit and loss in a bull or bear contract, the investor needs to take cognizance of some financial costs that include;

Issue price of the CBBC; The issue price contains the funding cost, and the issuer of the contact (investment bank) is required to specify the formula for calculating the funding costs at the contract launch. The funding cost will include the issuer’s financing or stock borrowing costs after adjustment for expected ordinary dividends of the shares.

The items in a funding cost are unstable and fluctuate at intervals making the funding costs unfixed throughout the contract’s tenure. However, the longer the Callable bull/bear contract duration, the higher the funding costs.

If you come across a Callable bull/bear contract (CBBC) named BTC-20DEC-14550C-A, how do you interpret it?

“BTC” means the underlying asset is BTC_USDT spot index;
“20” refers to the maturity year of 2020;
“DEC” means the maturity date is in December;
“14550” is the strike price;
“C” is short for “call” while “P” is short for “put.”
“A” indicates that the same issuer has issued multiple BTC CBBCs that expire in the same month but with different terms. “A” is used to mark the difference.-

Pros of Callable Bull/Bear Contract

Some of the notable advantages of the Callable bull or bear contracts:

Profit maximization: The callable Bull/bear contract is a leveraged investment opportunity that when your prediction of an underlying asset goes right, you tend to get a high return on investment.

Ability to take a Bullish or Bearish Position: As an investor, you have the discretion of taking the bullish contract when you think the underlying asset will keep increasing in price value. Similarly, you can take the bearish contract if you are optimistic that the underlying asset will drop in value.

Benefit without total cost: Investors of callable bull or bear contracts can benefit from the price performance of an underlying asset without paying the total cost. The investment bank will cover the remaining cost.

Cons Of Callable Bull/Bear Contract

The shortcomings of a flawed callable bull/bear contract include:

Increased Funding Cost: In the bull or bear contract, the funding cost is not static or specified and grows as the contract duration increases. So at the start of the callable bull or bear contract, you can not know how much the funding cost will be.

Higher loss: In CBBC, investors are likely to suffer significant losses in percentage terms if they expect the price of the underlying assets to move one way but move in another direction. That is, if an investor speculates that the price will move up, but it moves down.

Limited Lifespan: The lifespan of a bull or bear contract is between three months to five years. The lifespan might even be cut short if the contract is called before the expiry date making the CBBC worthless and invalid after it reaches the call price.

Conclusion

When investors buy the Bull contract, they maintain a bullish position on the underlying asset and benefit from the rise in its value. In contrast, when they buy the Bear contract, they take a bearish position on the asset and equally benefit from a reduction in its price.

Just like every investment opportunity, there are prevalent risks, and they are proportional to the amount of your investment. So when investing in a Callable Bull/Bear Contract, ensure that the amount invested is what you can forgo.

Finally, it is advisable to compare the funding costs of different CBBC issuers before signing the contract and identifying the best issuer with the good features and underlying assets.