I still remembered back when I started off trading in the stock markets in 2017, I only knew how to “long” the market – meaning buying stocks at a lower price, and then selling at a higher price, with profits being the difference between the buy and sell price.

However, if the markets trend lower, then I am unable to get into trade – even though I can “short sell” (meaning to sell the stock first, and then buy back at a lower price – provided if the share price trends lower), but the problem with doing so is that, if the share price do not go in the intended direction (i.e. lower) but instead gaps up suddenly, then I will risk suffering from huge losses (because I will have to buy back the shares at much higher prices.)

That was before daily leverage certificates (or DLCs for short) came along – today, retail traders can make use of it to go “long” as well as “short” – in fact, one of the best things I like about DLCs is that, I do not need to worry about suffering from massive losses if I want to “short” a particular counter, as losses are capped (where the maximum amount of money I will lose is the amount of money I put into buying the DLC.)

Speaking of DLCs, UBS, which is currently the #1 in warrants and CBBCs (Callable Bull Bear Contracts) issuer in Hong Kong, have a total of 74 DLCs on 29 Hong Kong counters and a US index (Nasdaq-100 index) for retail traders to trade in, and potentially generating profits in both bullish as well as bearish market conditions.

If you are new to DLCs, not to worry – in this post, you’ll learn about the basics you need to know about them, including more information on what these DLCs are, how to trade them, the 29 Hong Kong counters and 1 US counter you’re able to trade DLCs on, debunking on 2 of the most common misconceptions people have about trading DLCs, pros and cons about trading DLCs, and finally, what you can do if you want to get your feet wet in trading DLCs without using your own money.

Let’s begin:

What are DLCs?

To explain in layman terms, they are exchange-traded investment products (meaning you can trade DLCs off your local brokerage platform just like how you will trade equities) that allow retail traders to potentially profit in both bullish (through “long” DLCs) as well as bearish (through “short” DLCs) markets. If you are bullish, you can buy the Long DLCs; if you are bearish, you can buy the Short DLCs.

Apart from the fact that your losses are capped at the amount of money you put into buying the DLC (which I have explained earlier), another thing to note is the leverage built into these DLCs (for UBS DLCs, it is 5x for stocks, 5x and 7x for indexes) – what this means is that, if you were to buy a 5x “long” DLC, and the share price of the underlying stock goes up by 1%, then you’ll generate a 5% profit as a result of the 5x leverage (however, if the underlying stock price goes down by 1%, you will lose 5% if you were to buy a 5x “long” DLC.)

That said, DLCs' performances are simple to calculate as they follow the daily 5x or 7x relationship above, apart from a small daily cost and fees which I will mention later in the article. This is unlike other products for example Structured Warrants where the pricing involves other complicated factors such as implied volatility and time decay.

Finally, because DLCs are classified as a Specified Investment Product (SIP), you will need to specifically apply through your brokerage platform and receive approval before you can start trading them – you can find out the exact requirements via SGX’s website here.

Which Underlying Hong Kong Stocks Can I Trade with UBS’ DLCs?

At the time of writing, you can trade the following 26 Hong Kong equities (all 5x leverage, and there are “long” and “short” DLC options available), 3 Hong Kong Indexes, and 1 US Index (you have the option to trade either 5x or 7x leverage, and go either "long" or "short") with UBS DLCs:

Hong Kong Equities:

• AIA (HKEX:1299)
• Alibaba Group Holding Ltd (HKEX:9988)
• Anta Sports Products Ltd (HKEX:2020)
• BYD Company (HKEX:1211)
• China Construction Bank (HKEX:939)
• China Life Insurance Co Ltd (HKEX:2628)
• China Merchants Bank (HKEX:3968)
• China Mobile Ltd (HKEX:941)
• CNOOC Ltd (HKEX:883)
• COSCO Shipping Holdings (HKEX:1919)
• Galaxy Entertainment Group Limited (HKEX:27)
• Geely Automobile Holdings Ltd (HKEX:175)
• Hong Kong Exchanges and Clearing Limited (HKEX:388)
• HSBC Holdings plc (HKEX:5)
• JD.com Inc. (HKEX:9618)
• Kuaishou Technology (HKEX:1024)
• Lenovo Group Limited (HKEX:992)
• Li Ning Co. Ltd. (HKEX:2331)
• Meituan (HKEX:3690)
• NetEase Inc. (HKEX:9999)
• Petrochina (HKEX:857)
• Ping An Insurance (HKEX:2318)
• Sunny Optical Technology Company Limited (HKEX:2382)
• Tencent Holdings Ltd (HKEX:700)
• WuXi Biologics (Cayman) Inc. (HKEX:2269)
• Xiaomi Corp (HKEX:1810)

Hong Kong Indexes:

• Hang Seng Index (HSI)
• Hang Seng China Enterprises Index (HSCEI)
• Hang Seng TECH Index (HSTECH)

United States Index:

• NASDAQ Index

For the most updated list of UBS DLCs you can trade in, you can check out a list of DLCs available for you to trade on UBS’ website here.

How to Trade DLCs?

Assuming you already have approval to trade DLCs, the way to trade them (as I’ve mentioned in the beginning of this article) is the same as how you trade equities on your brokerage platform.

For instance, if you want to go “long” on Alibaba, there are 2 DLC options for you to choose from:

• Alibaba 5xLongUBS250430 (under the ticker symbol XBFW)
• Alibaba 5xLongUB241231 (under the ticker symbol WA9W)

Don’t be intimidated by the long name, its actually very easy – for the case of Alibaba 5xLongUB250430, “Alibaba” is self-explanatory (it is the name of the underlying equity), “5x” means 5 times leverage, “Long” means you’re going “long” on Alibaba, “UB” is the name of the issuer, UBS, and finally, “250430” is the expiration date of the DLC in YYMMDD format (no need to worry so much about this.)

Similar to buying equities, you also need to buy DLCs in multiples of 100. Again using the example of the Alibaba 5xLongUBS250430 DLC, currently the “Ask” (which is the buy price) is at S$0.103, hence you’ll need to spend a minimum of S$10.30 to trade in the particular DLC (the amount excludes all brokerage and platform fees) to buy a hundred of this DLC (a pretty small amount to start off in my opinion. Also, as I’ve also mentioned earlier, the maximum amount you will lose is the amount you paid for the DLC, which in this case is just S$10.30.)

Another thing to take note when you trade these DLCs is that, even though the underlyings are Hong Kong stocks and indexes, you follow the trading hours of Singapore (just like you trade a Singapore-listed counter), as these DLCs are listed on the Singapore Exchange. But obviously when Hong Kong has closed (either for the day or due to public holiday) while Singapore is open, you won't see issuer providing a market on the DLC counters.

2 Common Misconceptions about Trading DLCs

From my understanding, the reason why most people are staying away from DLCs are because of these 2 conceptions they have about trading them, and they are:

Misconception #1: Worried about being Unable to Execute Sell Order for DLCs with Low/No Trading Volume

One of the main concerns traders may have when it comes to trading DLCs (particularly those with little or no trading volume) is that they are worried about their “sell” orders being unable to fulfill – with regard to this, as long as traders were to place their “sell” order at a price that is the same as the current “bid” price, their order will definitely be executed (this is akin to selling equities at their current “bid” price, where orders will immediately be executed.)

That said, however, you need to be mindful that for DLCs with little or no trading volume, the bid/ask spread will be wider compared to those with higher trading volume. But again, UBS, as the market maker, has the obligation to provide continuous market making (meaning you will be able to execute your sell trade at the “bid” price, and buy trade at the “ask” price.) If you have any doubt about trading UBS DLCs, you can get in touch with them via email at ol-sg-dlc@ubs.com or via phone at 800-8523932.

Misconception #2: Complicated Cost & Fees to Hold a DLC Overnight

One of the other top concerns which traders may have is the cost to hold a DLC trade overnight – to simplify things, all you need to note is the “Daily Cost” specified under “Cost & Fees” for the particular DLC you are trading – at the time of writing, if you were to trade the HSI 5xShortUB250430 (SGX:QXPW), the daily cost is 0.000072, which is a theoretical value because as you can see it is much less than the minimum tick of the product which is $0.01.  (do note that this cost fluctuates everyday – depending on each cost component but not like Structured Warrants that increase with time) – meaning to say if you bought 100 DLCs in a single trade, then your cost to hold this particular DLC trade overnight is just a small amount of $0.0072 ($0.000072 x 100 DLCs.). This cost is reflected in the bid/offer and is not charged separately.

That said, most of the traders tend to open and close a DLC trade within the day itself – and if you do so, then this overnight cost will not be incurred. You will however still be subject to bid and offer spread.

Pros & Cons about Trading DLCs

Pros:

1. Gaining Exposure to HK Stocks with Forex Exchange Spread (of the Hong Kong Dollar) – By trading these Hong Kong counters using DLCs, I am not subject to forex conversion as these DLCs are traded using the Singapore Dollar. However, I will still be subjected to the risk of appreciation/depreciation of Hong Kong Dollar against Singapore Dollar (meaning to say if the Hong Kong Dollar appreciates against the Singapore Dollar, even if the underlying stock’s share price doesn’t move, the DLC denominated in the Singapore Dollar will go up, and vice versa.)

2. Potentially Generate Profits in Either Market Direction – If your technical analysis on a particular counter suggest that the near-term movement is up, you can trade the “long” DLCs; on the other hand, if your technical analysis suggests that in the near-term, the share price of a particular counter is trending downwards, you can trade the “short” DLCs – this allows you to generate profit regardless of the underlying stock’s price movement.

3. Gains are Magnified – Unlike trading the underlying counter directly, where you will generate a 1% profit should the share price goes up by 1%, but if you were to buy a 5x DLC, if the underlying stock price goes up by 1%, you will generate a 5% profit (because of the 5x leverage factor.)

4. Your Potential Losses are Capped – If you have been trading in the stock market for quite awhile, you’ll know that there are no “sure wins” when it comes to trading. Another thing I like about DLCs, especially if I want to “short” the market, is that my potential losses (should the share price of the underlying counter I’m buying DLC in gaps up suddenly, instead of continuing its downward descend) is capped at the amount of money I paid to get into DLC trade. 

5. No Risk of “Margin Calls” – Because your potential losses are capped by the amount of money you put in to buy the DLC, there are no risk of “margin calls” (this is one of the biggest risks when it comes to trading leveraged products, but when it comes to trading DLCs, there are no such risks.)

Cons:

1. Bid/Ask Spread Can be Wider for DLCs with Low/Little Volume – One thing you need to be mindful about when it comes to trading DLCs with low/little volume is that the bid/ask spread can be wider – take for instance a DLC which has zero volume at the time of writing (COSCO 5xShortUB250430), the “bid” price is S$0.435, and the “ask” price is S$0.445 (a 2-pip spread.) However, for a DLC with a decent trading volume, there’s no such issue (one example being the HSI 7xLongUB241231 DLC, with the “bid” at S$0.028 and ask at S$0.029 at the time of writing – the spread is just 1-pip.) But at the same time, the “actual” spread you are subject to is the percentage instead of the number of ticks. 2-pip spread on a DLC worth S$0.435 is 2.3% while 1-pip spread on a DLC worth S$0.028 is 3.6%.

2. Losses Can Be Magnified – Just like I have mentioned under “pros” where your potential gains will be multiplied if the underlying stock’s share price moves in your favour, the flip side is that, if the underlying stocks’ share price moves in the opposite direction, then your potential losses will also be multiplied (meaning if you were to buy a 5x “long” DLC, if the underlying stock’s share price drops by 1%, you will suffer from a 5% loss – even though your total loss will not be more than the amount you’ve paid to buy the DLC.)

How You Can Practise Trading DLCs Without Using “Real Money”

For those who are new to DLCs and would like to get your feet wet in trading them without using real money, you can join the upcoming “UBS Leverage Trading Tournament 2022” brought to you by InvestingNote as well as UBS – where, between 31 October 2022 and 18 November 2022, you’ll be given a virtual capital of SGD100,000.00 to trade the UBS DLCs (in my opinion, that’s more than enough money for you to start trading DLCs and amass a good amount of experience at the end of it to start trading them using your own money.)

That’s not all – by joining the competition, you stand a chance to win up to S$4,000 in cash if you end up being a winner of it! On top of that, simply by registering, you have a chance to win for yourself attractive prizes including an Apple TV 4K setup, Samsung 27″ essential curved monitor, and a Nintendo Switch OLED console.

I can’t think of any other better way to get started to get your feet wet and gain some experience on trading the UBS DLCs than joining this competition, which you can sign up here.

Closing Thoughts

Just to recap, one of the things I like about DLCs is the fact that I can “short” the market without worrying about burning a big hole in my pocket, as losses are capped (you will not lose more than the amount you put into trading the DLC.)

Another thing I like is the fact that I do not have to worry about foreign exchange when trading the Hong Kong counters through DLCs (as they are denominated in Singapore dollars.)

No doubt the leverage factor of DLCs can work in your favour, as well as against, but for the latter, do note that your potential losses is capped by the amount of money you put into buying the DLC.

With that, I have come to the end of today’s post. I hope the contents presented above give you a good understanding about DLCs.

Disclaimer: The Singaporean Investor receives a small fee for this post written in partnership with UBS.