A Comprehensive Guide to Callable Bull/Bear Contracts: In-Depth Analysis of the Mandatory Call Mechanism

Bull/Bear Contracts are a popular leveraged investment tool in the Hong Kong market, enabling investors to participate in market movements and seize short-term opportunities with relatively low capital outlay. However, their unique "Mandatory Call Mechanism" often poses a major hurdle for many new investors. Once the price of the underlying asset hits the call level, your Bull/Bear Contract will be immediately called, and you could lose your entire investment. This article breaks down the workings of the Mandatory Call Mechanism in a clear and accessible way to help you understand this investment product.

What are Bull/Bear Contracts?

Bull/Bear Contracts (Callable Bull/Bear Contracts, or CBBCs) are structured products listed on the Hong Kong Stock Exchange designed to track the price performance of underlying assets such as the Hang Seng Index, specific stocks, or commodities. Unlike direct stock trading, Bull/Bear Contracts allow you to participate in price movements by investing only a portion of the underlying asset’s value, thereby providing a leveraged effect.

There are two main categories of Bull/Bear Contracts:

Bull Contracts (Bull): Suited for investors who are optimistic about the outlook for the underlying asset. When the asset price rises, the theoretical value of the Bull Contract also increases.

Bear Contracts (Bear): Suited for investors with a bearish view of the market. When the asset price falls, the theoretical value of the Bear Contract increases.

Longbridge Securities, as a new-generation online broker, offers a diverse range of investment products covering the Hong Kong market, including Bull/Bear Contract trading services, enabling investors to trade in different markets.

Key Point: The main difference between Bull/Bear Contracts and Warrants is the call mechanism. Bull/Bear Contracts have a clearly defined call price; once this price is reached, they are mandatorily called. Warrants do not have this mechanism.

The Mandatory Call Mechanism: The “Life or Death Line” for Bull/Bear Contracts

The Mandatory Call Mechanism is the most critical and riskiest feature of Bull/Bear Contracts. In simple terms, the issuer sets a “call price” (also known as the recall price or redemption level) for each Bull/Bear Contract. During the validity of the contract, if the price of the underlying asset touches or breaches this call price at any point, trading in the Bull/Bear Contract is immediately suspended and it is mandatorily called.

How Does the Call Mechanism Operate?

Let’s illustrate with a Hang Seng Index Bull Contract:

Suppose you buy a Hang Seng Index Bull Contract when the index is at 18,500 points, and the contract’s call price is set at 18,200 points. Even if the index only drops to 18,200 points for a few seconds during the trading session, your Bull Contract will be immediately called and cease trading. Even if the index quickly rebounds afterward, your contract has already been called, and you cannot profit from any subsequent rise.

In the market, a Bull/Bear Contract being called is commonly referred to as “hit the trigger”.

The Relationship Between Call Price and Strike Price

Besides the call price, Bull/Bear Contracts also have another important concept: the “strike price.” The relationship between these two determines the contract type and whether there is any remaining value after a call:

Bull Contracts: Strike price is typically lower than the call price.

Bear Contracts: Strike price is typically higher than the call price.

The distance between the call price and the current price of the underlying asset is a key risk indicator. The closer the distance, the higher the risk of being called—but the greater the leverage. The farther the distance, the lower the call risk, but the leverage effect is also weaker.

Investment Tip: Choosing Bull/Bear Contracts with a call price further from the current underlying price provides a wider safety margin.

How is Residual Value Calculated?

When “R-type” Bull/Bear Contracts are called, they enter an “observation period” to determine if any residual value remains. The observation period covers two Hong Kong trading sessions:

• If called during the morning session, the observation period lasts until the close of the afternoon session that day.
• If called in the afternoon session, the observation period extends until the close of the midday session on the next trading day.

Residual Value Calculation Formula:

For Bull Contracts: (Lowest price of the underlying asset during the observation period – Strike price) ÷ Conversion ratio

For Bear Contracts: (Strike price – Highest price of the underlying asset during the observation period) ÷ Conversion ratio

If the result is negative, the residual value is zero and investors do not need to pay any extra costs.

Practical Example

Suppose a Hang Seng Index Bear Contract has the following parameters:

• Strike Price: 28,500 points
• Call Price: 28,300 points
• Conversion Ratio: 10,000

If the index hits 28,311 points on a certain day, the Bear Contract is called. During the subsequent observation period, the index reaches a high of 28,388 points.

Residual value calculation:

(28,500 - 28,388) ÷ 10,000 = HK$0.0112 per unit

This means investors get HK$0.0112 in residual value for each contract held. The residual value is automatically credited to your securities account about three settlement days after valuation.

The Main Risks of Bull/Bear Contracts

Before investing in Bull/Bear Contracts, it is essential to fully understand their inherent risks so you can make an informed decision.

1. Mandatory Call Risk

This is the most distinctive and significant risk of Bull/Bear Contracts. Once the underlying asset price touches the call price—even momentarily—the contract will be immediately called and trading ceases. Investors may lose most or all of their invested principal, and this process is irreversible.

During periods of high market volatility, prices may move dramatically in a very short time, greatly increasing the risk of being called. This is especially true during major economic data releases, breaking news, or around market open and close when volatility is heightened.

2. Leverage Risk

The leveraged nature of Bull/Bear Contracts means that even small fluctuations in the underlying asset’s price can cause large swings in the contract’s price. While leverage can amplify potential profits, it also significantly magnifies losses.

If the underlying asset moves against your view, your loss can be faster and greater than direct equity investment. High-leverage Bull/Bear Contracts are especially risky.

3. Financing Costs

The pricing of Bull/Bear Contracts includes financing costs (interest expenses), which are the implicit cost of leverage borne by investors. Even if the underlying asset’s price remains unchanged, the value of Bull/Bear Contracts will decrease over time due to financing costs, a phenomenon known as “time value decay.”

4. Liquidity Risk

Although issuers generally provide liquidity for Bull/Bear Contracts, during highly volatile or extreme market conditions the bid-ask spread can widen significantly, and it may be difficult to execute trades. This can affect your entry and exit prices and timing.

5. Issuer Credit Risk

Bull/Bear Contracts are unsecured notes issued by the issuer (usually large investment banks). While issuers in Hong Kong are sizable financial institutions, in theory, if the issuer faces financial difficulties, investors may lose their entire investment.

How to Trade Bull/Bear Contracts?

The procedure for trading Bull/Bear Contracts in Hong Kong is virtually the same as trading regular stocks and is very straightforward.

Account Opening Requirements

You only need a securities account that is eligible for Hong Kong equity trading. There is no need to open a margin or options account. Bull/Bear Contracts are listed on the main board of the Hong Kong Stock Exchange, with five-digit stock codes.

Trading Hours and Methods

The trading hours for Bull/Bear Contracts are the same as those for Hong Kong stocks’ morning and afternoon sessions. However, Bull/Bear Contracts stop trading at 16:00, before the closing auction session of equities (which runs until 16:10). Price movements in the underlying asset during this period may still trigger a mandatory call:

• Morning session: 09:30 - 12:00
• Afternoon session: 13:00 - 16:00

You can trade Bull/Bear Contracts via online trading platforms, mobile apps, or by calling your broker. The trading process is identical to buying and selling stocks: enter the contract code, quantity, and price to place your order.

Trading Fees

Bull/Bear Contract trading incurs the following fees:

• Brokerage commission (varies by broker)
• Transaction levy: 0.00565%
• SFC transaction levy: 0.0027%
• Financial Reporting Council Transaction levy: 0.00015%
• Trading system usage fee: HK$0.50 per trade

Additionally: Bull/Bear Contracts are exempt from the 0.1% stamp duty, reducing transaction costs for short-term trading.

Longbridge Securities offers zero commission for life, enabling investors to trade Bull/Bear Contracts more cost-effectively and reduce overall investment costs.

Settlement Arrangements

Bull/Bear Contracts use a T+2 settlement system, meaning transactions are settled two business days after the trade date. Purchased contracts are credited to your securities account on T+2, and sale proceeds are available on T+2 as well.

Frequently Asked Questions

Do Bull/Bear Contracts Have Value After Being Called?

It depends on whether the Bull/Bear Contract is N-type or R-type. N-type contracts become worthless after being called—investors receive no payment. R-type contracts may still have residual value after being called, but this is not guaranteed and depends on the price movements of the underlying asset during the observation period. Even if there is residual value, the amount is typically much less than the original investment, so investors usually still suffer significant losses.

How Can I Avoid Having My Bull/Bear Contract Called?

The most effective way is to choose contracts with a call price far from the current underlying asset price, which gives a larger buffer. Also, closely monitor the asset’s price and exit before it nears the call price—this is an important risk management measure. Be extra cautious during periods of high volatility or major events, and consider staying out of the market if risk is elevated.

Should Beginners Choose Bull or Bear Contracts?

It depends on your view of the underlying asset’s direction. Choose a Bull Contract if you expect prices to rise, or a Bear Contract if you expect prices to fall. For beginners, it is even more important to start with small amounts, first getting familiar with how Bull/Bear Contracts work and the rhythm of the market. It is recommended that you practice on a demo platform or limit your Bull/Bear Contract positions to no more than 5–10% of your overall portfolio, gradually increasing exposure as you accumulate experience.

Are Bull/Bear Contracts Suitable for Long-Term Investment?

No, they are not. Bull/Bear Contracts are designed specifically for short-term trading and are not meant for long-term holding. Main reasons: (1) the risk of being mandatorily called increases with time held; (2) financing costs accumulate over time and erode returns; (3) Bull/Bear Contracts have expiry dates and cannot be held indefinitely.

Can You Buy Bull/Bear Contracts When They Are Near the Call Price?

In theory, yes—but the risk is extremely high. Contracts near the call price offer high leverage and volatility, but even a small fluctuation in the underlying asset can trigger a mandatory call, causing you to lose your entire investment in a very short period. This strategy is like “dancing on a knife’s edge”—even experienced traders need to be extremely cautious, and beginners should not attempt this high-risk approach.

How Do You Know If Your Bull/Bear Contract Will Be Called?

You need to monitor the real-time price of the underlying asset and compare it to your contract’s call price. Most financial information platforms and brokerage systems will display the call price for Bull/Bear Contracts. Once the underlying price approaches the call price (e.g., within 3–5%), you should be highly alert and consider exiting early. Remember, market prices can move very quickly—do not wait until the last minute to act.

Before starting to invest in Bull/Bear Contracts, be sure to study and practice thoroughly, starting with small amounts to accumulate experience. You can learn more about investment strategies through the Longbridge Academy or by downloading the Longbridge App.