Callable Bull/Bear Contract (CBBC): What Is It and How Does It Work?

What is CBBC?

A Callable Bull/Bear Contract (CBBC) is a financial derivative tool enabling investors to take leveraged stances on the price fluctuations of an underlying asset, which could be a stock, index, commodity, or forex. CBBC are commonly traded in financial markets such as Hong Kong and may also be referred to as "mini-warrants" or "inline warrants" in specific regions.

How does CBBC work?

A CBBC comprises two primary aspects: the "bull" side and the "bear" side. The bull facet caters to investors foreseeing a rise in the asset's price. On the other hand, the bear side accommodates market participants adopting a bearish stance, expecting a price decline.

The term "callable" refers to the feature that allows the issuer of the CBBC to terminate the contract before its expiry date under certain conditions. These conditions typically involve the price of the underlying asset reaching a predetermined level. When the callable feature is triggered, the CBBC stops trading, and investors receive a cash settlement based on the prevailing market price.

In terms of the price and liquidity, as CBBCs are traded on exchanges, just like stocks, their prices and liquidity are largely influenced by factors such as the price of the underlying asset, volatility, time to expiration, and demand. In particular, the price level of the underlying asset is crucial to determine whether the CBBC will be called or not. If the price of the underlying asset reaches or breaches a specified strike level, the callable feature may be triggered.

But unlike stocks, CBBCs have an expiration date, beyond which they become worthless if not called earlier. This expiration date limits the time frame during which investors can hold the contract and make gains or losses.

It's crucial to recognize that, as a leveraged tool, CBBC could come with higher risk. While CBBCs offer potential for higher returns due to leverage, they also come with higher risk. Investors can potentially lose more than their initial investment.

CBBC vs Knock-Outs

Callable Bull/Bear Contracts (CBBCs) and Knock-Outs are both derivative financial instruments, but they differ in terms of their versatility in market sentiment, termination mechanisms, and overall risk profiles. It’s important to understand their mechanics and risks before trading either CBBCs or Knock-Outs.

Market Sentiment Exposure: CBBCs cater to both bullish and bearish investors, while Knock-Outs are structured as one-sided instruments. Knock-Outs come with a specific "knock-out" level, and if the price of the underlying asset reaches or breaches this level, the contract is terminated, and the investor's position is closed.

Leverage: Both CBBCs and Knock-Outs involve leverage, but Knock-Outs’ leverage effect might be less profound as they typically have a fixed leverage factor.

Termination: CBBCs enables the issuer to terminate the contract before its expiry under certain conditions, often related to the price of the underlying asset. But Knock-Outs are terminated if the price of the underlying asset reaches or breaches a predefined level. This termination mechanism is automatic and doesn't involve the issuer's discretion.

Risks: Given that CBBCs are exposed to both rising and falling markets, they inherently carry higher risk due to their versatility on both sides. In contrast, the risk associated with Knock-Outs is relatively more contained, as these contracts are structured with specific knock-out levels and allow for only one directional bet. Besides, it's important to note that both CBBCs and Knock-Outs are susceptible to issuer and credit risk, given that they are typically issued by financial institutions.

How to trade Knock-Outs

Trading Knock-Outs allows you to take a position on shares, indices, cryptos, commodities, forex and more. Learn how to trade Knock-Outs step by step, from opening an account to closing a position:

1. Learn more about knock-outs trading
2. Create an IG trading account
3. Choose your market
4. How to place a knock-out trade?
5. Monitor your trade and manage your risk

Learn more about knock-outs trading

Knock-outs are a limited-risk product with an expiry. They move one-for-one with the underlying price1, and close automatically if your chosen knock-out level is hit. By choosing your knock-out level and your trade size, you can manage your maximum risk for each trade.
Your first step towards trading Knock-outs is to learn how they work. Read our quick introduction: what is Knock-outs trading and how does it work?

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How to place a knock-out trade?

Here is a hands-on example to set up your knock-outs trade order.

Monitor your trade and manage your risk

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CBBCs Summary

A Callable Bull/Bear Contract (CBBC) is an investment tool that lets investors take leveraged positions on the price movement of an underlying asset, such as a stock or index. It has two sides: the "bull" side for those expecting the asset's price to rise, and the "bear" side for those anticipating a price drop.

CBBCs have a "callable" feature, meaning the issuer can end the contract under specific conditions, often tied to the asset's price. If triggered, trading stops, and investors receive a cash settlement based on prevailing prices. CBBCs offer the potential for higher gains and losses due to leverage, so investors need to be aware of the risks involved before trading them.

With IG, you can also engage in knock-out options trading, enabling investors to exercise greater control over their risk exposure.