Daily Leverage Certificates (DLCs) offer investors fixed leverage of up to 7 times of the daily performance of the underlying asset, such as market indices or single stocks. The basic principle is simple – if the underlying moves by 1% from its closing price of the previous trading day, the value of a 5x DLC will move by 5%.
Main Characteristics of DLCs:
- Fixed leverage of up to 7 times both long and short (e.g. 3, 5 or 7 times)
- No margins required
- Low capital outlay and loss limited to invested amount
- No implied volatility impact*
- No time decay impact**
For Longing and Shorting Markets
DLCs are designed to be traded over short periods of time, predominantly on an intra-day basis. DLCs offer the flexibility to trade both rising and falling markets. For each underlying and leverage level, there is a long and short DLC available.
A bullish investor who expects an underlying asset to rise over the trading day can select, for example, a 5x Long DLC, which will rise in value by 5% for each 1% rise in the underlying asset (before cost & fees).
Similarly, a bearish investor who thinks the underlying asset may fall can instead select, for example, the 5x Short DLC, which will rise in value by 5% for every 1% fall in the underlying asset (before cost & fees).
Conversely, if the investor bought a 5x Long DLC but the underlying asset’s value falls, for every 1% the underlying assets fall, the value of the 5x Long DLC will decrease by 5% (before cost & fees). Do note though the investor’s entire invested capital will be at risk, but the maximum total loss will be restricted to not more than the total capital invested.
If the investor’s trading horizon is over a few days, it is important to note that the performance of the DLC may vary from the leverage factor of the DLC. This is because the performance of the underlying asset and the DLC is reset at the end of each trading day.
When markets open the next day, the performance of the underlying asset and the DLC will be measured against the closing levels^ recorded on the previous trading day. This means that any subsequent performance of the DLC is calculated based on the performance achieved the day before. The same process is repeated on each trading day. Over the period of more than one day, the profits or losses are thus compounded.
The airbag mechanism is a built-in mechanism that reduces the actual exposure of the DLC to changes in the underlying asset in extreme market conditions. Do note the airbag mechanism will only be triggered upon movements of the underlying that go against the direction of the DLC.
For Equity Index Underlying – The airbag mechanism will only be triggered if the underlying index moved 10% against the direction of the 5x DLC and 7x DLC (underlying index dropped by 10% for Long DLCs, vice versa for Short DLCs).
Single Stock Underlying – The airbag mechanism will only be triggered if the underlying stock moved 15% against the direction of the 5x DLC (underlying stock dropped by 15% for Long DLCs, vice versa for Short DLCs).
Important points to note for Airbag Mechanism:
- When triggered, the airbag mechanism may reduce the ability of the DLC to recoup losses. This is due to the reduced exposure to the underlying asset.
- Airbag mechanism may not prevent total loss of initial investment amount.
Am I Suitable for DLCs?
DLCs are for investors who are willing to accept the risk of substantial losses up to the principal investment amount, possibly within a very short time frame. Investors should have enough understanding of the product, possess either a high level of knowledge or sufficient trading experience before they trade in the product.
All investors need to be Specified Investment Products (SIP) qualified to invest in DLCs. Do note that DLCs seek to achieve short-term investment results that correspond to the daily magnified performance of the underlying.
*Implied volatility is the market’s expectation of the fluctuation in the price of the underlying asset over the remaining lifespan of the product. The higher the implied volatility, the wider the expected price fluctuation of the underlying asset. This in turn means there is a higher probability for the option or warrant to trade deeper in-the-money and the investor making a higher profit. Options or warrants with a high implied volatility will therefore be priced higher
**Time decay is the change in an option’s or a warrant’s price as it gets closer to the option’s or the warrant’s expiry date. The option or warrant value (chance of getting “in-the-money”) declines over time (i.e. as it gets nearer to the expiry date).
^Closing level of the DLC refers to the daily value computed using the valuation formula of the DLC stated on the relevant supplemental listing documents at market close. The closing level is published daily on the issuer's DLC website.