The financial terms of “bulls & bears” are definitely familiar to investors. What is a CBBC exactly? “C” stands for contract. If someone wants to create an expectation for the future market, he may as well hold CBBCs. There are two types of contracts, a Bull contract and a Bear contract. You can choose Bulls if you are bullish and choose Bears if you are bearish.
CBBC is a financial derivative with a simple mechanism. Trading CBBCs is like buying and selling spots, with low entry fees and the advantage of a combination of broad market prediction and high volatility. This article will help you understand the nature of CBBCs, the idea behind them and understand how to trade them!
What is a CBBC?
A CBBC can be regarded as your view of where the market is headed, represented by making a bullish or bearish purchase of a CBBC. Your investment in a bull or bear contract is equivalent to having the right — to buy or sell the underlying asset (any cryptocurrency) that the bull or bear tracks at an agreed price before the expiration date.
A Callable Bull/Bear Contract (CBBC) is a derivative and next step of the traditional option. It is an investment product with specific conditions, such as mandatory call, strike price, expiration date, and so on, in order to track the underlying asset (such as BTC). By investing a portion of the value of some asset, CBBC investors can track the trend of the asset instead of investing the asset’s full value. Hence, a CBBC investment has the attribute of leverage.
A CBBC is usually structured like this:
Let’s take BTC-20DEC-14550C-A as an example:
BTC: the characters before the first dash represent the underlying asset it tracks. In this example, the underlying asset is the BTC/USDT spot index.
20DEC : represents the year and month of expiry, “December 2020’ in this example.
14550C: the numbers represent the strike price and the symbol represents whether it is a callable bull contract or a callable bear contract, “C” for a bull contract and “P” for a bear contract. In this example, the strike price is 14550 USDT and it is a callable bull contract.
A: identifier of the CBBC as the issuer may have issued several CBBCs with the same expiry month but different terms (such as different strike prices).
-How to trade CBBC (e.g. on Gate.io)
Step 1. click “Derivative”-CBBC
Step 2. View all available CBBCs. Currently, Gate.io provides both BTC and ETH as underlying assets.
Step 3. After consideration, set your parameters and choose your side!Bullish or bearish, leverage ratio, CBBC callback percentage, premium, etc.
Bullish: buy Bull Contracts
Bearish: buy Bear Contracts
High risk/high return: choose a high leverage ratio
Low risk/low return: choose a low leverage ratio
Choice of the expiry date
As the CBBC gets closer to its expiration, its funding costs will be less.
Underlying asset price
Changes in the price of the underlying asset directly affect the price of a CBBC, if the price of the underlying asset rises, the price of the Bull contracts rises; if the price of the underlying asset falls, the price of the Bear contracts rises.
It is the price used to determine a CBBC’s residual value. If the underlying asset price is above the strike price for a callable bull contract, or below the strike price for a callable bear contract, the CBBC has residual value.
It is the estimated value of a fixed asset at the end of its term (expiry date).
Call price & To Call Price %
To Call Price % refers to the distance (percentage difference) between the underlying asset price and the CBBC’s call price. When the price of the underlying asset of the CBBC reaches the call price, the CBBC will be forcibly called, and the CBBC will no longer be able to be traded. When other parameters remain unchanged, the closer the call price to the current price is, the higher the call risk and the higher the leverage ratio. Aggressive investors can choose CBBCs with near call prices, while conservative investors can choose CBBCs with far call prices.
Entitlement Ratio refers to the number of CBBCs purchased for one unit of the underlying asset. It reflects the sensitivity of the CBBC to changes in the price of the underlying asset. The higher the ratio, the less sensitive it is to changes in the price of the underlying asset in the same price area; the lower the ratio, the more sensitive it is to changes in the price of the underlying asset. When the market is more volatile, a CBBC with lower sensitivity and a higher ratio can be considered; when the market is less volatile, a CBBC with higher sensitivity and a lower ratio can be considered.
This refers to the funding costs of the CBBCs, charged by the issuer. When CBBCs with the same call price and different expiration dates are subject to a mandatory call, investors holding CBBCs with lower premiums will lose less in funding than those holding CBBCs with higher premiums.
The actual price of a CBBC consists of intrinsic value and funding cost. Intrinsic value involves the difference between the current price of the underlying asset and the strike price.
The intrinsic value of a bull contract = (spot price of the underlying asset — strike price) /Entitlement Ratio
The intrinsic value of a bear contract = (strike price — spot price of the underlying asset) /Entitlement Ratio
the issuer’s financing cost to create the CBBC. The funding cost is built into the CBBC’s price at launch, tending to decrease gradually as the CBBC is approaching maturity.
CBBC Expiry Settlement
A CBBC that has not been called before expiry will be suspended for settlement on the expiry date. The settlement price is the price of the underlying asset at the time of the last transaction.
The settlement formula for expiry of CBBC:
For a callable bull contract, the cash value=(Settlement Price-Strike Price)/Entitlement Ratio
For a callable bear contract, the cash value= (Strike Price-Settlement Price)/Entitlement Ratio
CBBC Settlement after a mandatory call
The CBBC enters the “observation period” after being called by force. If the price of a CBBC rises or falls below the strike price during an observation period, the remaining value of the CBBC will go to zero; if the CBBC does not rise or fall below the strike price during the observation period, the bull contract will settle at the highest price and the bear contract will settle at the lowest price.
Step 4. Buy low, sell high to earn a profit
Characteristics of the CBBC:
CBBC trading is similar to spot trading, with no margin and extra operations, just purchase a bull contract when you’re bullish and a bear contract when you’re bearish.
CBBCs have a 1:1 ratio of price change to the underlying asset, and there is no implied volatility that would contradict the underlying price.
Investing in CBBCs generally requires less capital than investing directly in the underlying asset. As a leveraged investment, it allows investors to earn more with less capital. A CBBC can be highly leveraged, up to 100–200X (under certain circumstances).
This is the most distinctive feature of the CBBC — — a withdrawal mechanism. Each CBBC has a call price. Once the price of the relevant asset triggers the call price, the CBBC will stop trading and be forced to be called by the issuer to wait for settlement. The original expiry date is no longer valid. The mandatory call mechanism makes the risk of investing in CBBCs limited to the investment funds that have been paid. In theory, the risk of a CBBC is limited, but the return is unlimited.
After a mandatory call, CBBC enters an “observation period” to observe whether the price of the CBBC rises or falls below the strike price during two complete trading sessions.
Advantages of CBBCs compared with other investment types
1. Lower trading fees
Compared with other forms of investment, CBBCs have the advantage of higher leverage with lower trading fees. Take Gate.io for example.
CBBC Funding Cost: Strike Price/Entitlement Ratio × annualized funding rate × days until expiry/365
*The annualized funding rate is generally 7.3%, which may change as lending interest rate changes.
According to the above formula, the ratio of the funding cost to CBBC price is actually quite slight, because the cost will be reflected in the price of the CBBC and will decrease day by day. The closer the expiry date, the smaller the funding cost.
2. No worry about “pins and needles*” (a Chinese stock market term) being blown up.
In perpetual contract trading, users are often concerned about “pins and needles”. While in CBBC trading, users do not have to worry about this problem because of the issuer mechanism. And even if the problem does occur, the users’ position will not be called back since the call price of a CBBC is not determined by the price of the CBBC itself but the current price of the underlying asset.
*Pins and needles: token prices skyrocket or plummet suddenly.
3. Friendly to new users, and easy to operate
CBBC can be easily started at Gate.io with a simple mechanism and low entry fees. Just like trading spots, CBBC is a good choice for new users because it takes into account the advantages of market trend prediction and high volatility. Currently, Gate.io has launched BTC, ETH and other mainstream currencies trading.
Risks of CBBC
As we mentioned earlier, CBBCs are leveraged investments, which means that they also face the risks of leveraged investments. They can effectively magnify gains but losses as well. Due to leverage, the price fluctuation of a CBBC is generally higher than the price fluctuation of its underlying asset. If investors make a wrong prediction about the direction of the CBBC, they will bear much greater losses than spot transactions.
The mandatory callback mechanism of CBBC is a double-edged sword, with limited risks and unlimited returns; if it is forcibly called back, investors of that CBBC can only wait for settlement, which can incur capital loss.
CBBC Self-Assessment Questions
1. When the price of the underlying asset rises, the prices of the underlying bull contract and bear contract will:
A Rise & Fall respectively
B. Rise & Rise respectively
C. Fall & Rise respectively
Correct Answer: A
According to the calculation formulas of CBBC price (CBBC price = intrinsic value + finance charge) and its intrinsic value.
Intrinsic value of a callable bull contract=(Underlying Asset Price– Strike Price)/ Entitlement Ratio
Intrinsic value of a callable bear contract=(Strike Price -Underlying Asset Price)/ Entitlement Ratio
We know that when the price of the underlying asset rises, the price of the underlying bull contract will rise but the price of the underlying bear contract will fall.
2. The price of BTC was $19,000 two weeks ago, and rose to $20,000 last week. But it fell back to $19,000 this week, while the price of some BTC bull contract has a slight difference from two weeks ago. What is NOT possible to occur?:
A. Deducted finance costs
B. Time loss
C. BTC volatility changes the premium.
D. Increasing market positions have resulted in premiums being deducted as costs.
Correct Answer: B
Unlike leveraged ETFs, there is no time loss that affects the value of a CBBC.
3. When the current price of the underlying asset falls further away from the strike price of the bear contract, then the intrinsic price of the bear contract will:
A. keep still
Correct answer: B.
According to the calculation formula of the intrinsic value of the bear contract Intrinsic value of a callable bear contract=(Strike Price -Underlying Asset Price)/ Entitlement Ratio), the price of the related asset bear contract is constantly shrinking. Consequently, we can know that the intrinsic value of the bear contract will rise at the strike price.
4. When a CBBC is called at maturity, the funding cost will be:
Correct answer: B.
The funding cost on the CBBC is fully deducted at expiration, so there are zero charges.
5. If the call price is triggered, the CBBC will be settled after the observation period. A user holds a bull CBBC for the underlying asset BTC_USDT with a strike price of 9,000 USDT and a call price of 10,000 USDT, which of the following is correct?
A. If the minimum price during the observation period is lower than the strike price of 9000 USDT, and the residual value is zero, the user will not receive a rebate.
B. If the minimum price during the observation period is 9500 USDT and the strike price is not reached, the user will still not receive the residual value rebate.
The residual value of a bull contract that falls below the strike price during the observation period is zero. If the strike price is not reached, the highest price during the observation period is used as the settlement price to calculate the residual value to be given back to the user.
6. If a CBBC is not called and will be settled at expiration, so the value of the CBBC is related to what as it is settled: (Multiple choice)
A. Settlement Price
B. Exercise price
C. exchange rate
D. The current value of the underlying asset
E. Leverage Ratio
Correct answer: A & B & C
According to the CBBC expiration settlement formula, cash value of a CBBC = (settlement price — strike price)/ Entitlement Ratio
Bear Cash Value = (Strike Price — Settlement Price)/ Entitlement Ratio
The final conclusion is that the value of a CBBC at expiry is related to the settlement price, strike price, and exchange ratio.
Important Notice: This article does not intend to provide any investment suggestions. Please fully understand the risk of investing in virtual currencies
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