Main Differences Between Warrants and Callable Bull/Bear Contracts

The expiry date and implied volatility mainly affect the price movement of warrants, while the actual leverage of callable bull/bear contracts mainly depends on their distance to the call price.

About Warrants:

① Warrants have time value. The farther the expiry date, the higher the warrant’s value; the closer the expiry date, the lower the value. This is because the longer the time, the greater the chance for the underlying asset to reach the target price.

② Implied volatility measures the expected future volatility of the underlying stock price. The higher the implied volatility, the higher the warrant’s pricing. This is because greater volatility increases the likelihood that the underlying asset will hit the target price.

About Callable Bull/Bear Contracts (CBBCs):

CBBCs are not affected by expiry date and implied volatility, but require close attention to the call price.

CBBCs have a mandatory call feature: when the underlying stock price breaches the call price (either above or below, depending on bull or bear), trading of the CBBC will immediately cease, and the original expiry date becomes invalid. This means investors may lose all their invested capital.

Hence, the closer the underlying price is to the call price, the cheaper the CBBC price, and the higher the actual leverage.