Risk Disclosure Statement - Options and Other Derivatives Trading
To allow the Client (“you”) to fully understand the risk associated with stock option and other derivative business such as warrants and callable bull/bear contracts (“CBBC”), Tiger Brokers (Singapore) Pte Ltd (“TBSPL”) has prepared this risk disclosure statement for your information. Please read carefully the following contents. In case of any questions, please contact the support staff of TBSPL. This risk disclosure statement does not cover all risks and important matters in the trading of options and other derivatives. You should understand the nature of the subject to be traded and the degree of risk you are responsible for before any trading. Not all clients are suitable for participating in trading options and other derivatives and you should consider cautiously whether to participate in the trades aforesaid according to your own investment experience, financial strength and other relevant conditions.
1. Options trading
i. You should be fully equipped with the financial strength, expertise and investment experience necessary for options trading before engaging in any options trading. You should consider cautiously whether to purchase options after fully evaluating your own risk tolerance, investment experience, knowledge of the product, risk control capability etc.
ii. You should possess basic knowledge of, and understand options, relevant laws and regulations, the rules and announcements of the related exchange(s), as well as the rules of TBSPL before you decide to participate in any options trading.
iii. You should fully understand the characteristics of risk associated with options before you decide to engage in any options trading. Unlike stock trading, options are financial derivative products featuring gearing, time delay, co-movement and high risk. An option trade is a margin trade. An option is an exchange-traded specified investment product (as defined in MAS Notice SFA 04-N12 on Sale of Investment Products) with high volatility. It is common to experience significant price increases or decreases in one single trading day. Options contracts are traded for a specified period of time and have no value after expiration. Options therefore expose you to higher risk. You may suffer substantial losses, which may even exceed your account deposits.
iv. You should carefully read the terms and conditions of contract and rules associated with options to be purchased as well as the relevant responsibilities before you decide to engage in any options trading. The relevant exchange(s) may revise the terms and conditions of contract of the option not executed in some circumstances to reflect the change in relevant rights and interests.
v. You should understand that the risks associated with sell option trading are generally higher than the risks of buy option trading. Although the seller may obtain a premium, the seller may also suffer from loss which exceeds the premium due to the fluctuation in the price of contracted subject as the seller needs to perform the obligation of exercising. The options market may experience less liquidity than the equity market. In instances of very low market liquidity, it is possible for enforced liquidation or execution to occur at a very low /high price, resulting in a loss that exceeds the initial deposit.
vi. During options trading, you should pay attention to the ex-dividend and ex-right in case of dividend allocation, dividend payout, shares donation, capitalizing of common reserves, shares allocation and shares splitting or combination with respect to the contract subject. The relevant exchange(s) will adjust the contracting parties and exercise the price of the option contract within the period of validity, and the trading and settlement of the contract will be carried out as per the terms and conditions of the contract after the adjustment.
vii. Option trading is complicated. You should fully understand the rules of options trading, the correlation between the option price and the movement of the underlying stock price, to consider whether you can tolerate the risk of options investments before you decide to participate in option trading.
viii. You should check the terms and conditions of the options contract and the related obligations (for example, under what circumstances you may be responsible for the expiration date of the option and the exercise limit of the option). In some cases, the exchange or clearing company may modify the details of the outstanding contracts (including the option exercise price) to reflect the changes in the relevant assets of the contract. TBSPL is not responsible for any loss of trading that may result from your lack of awareness of the related rules.
ix. Different options strategies carry different risks and have different margin requirements. You should ensure that you are familiar with these risk and requirements. If the margin moves against you or if your options expire, TBSPL may call upon you to deposit additional amounts of margin on short notice. Such additional amounts can be substantial and if you do not provided the required margin within the time provided, your positions may be closed out and liquidated at a loss. You will be liable for any resulting deficit in your account.
x. Trading halts in the underlying security, or other trading conditions (for example, volatility, liquidity, systems failures) may cause the trading market for an option (or all options) to be unavailable, in which case, the holder or writer of an option would not be able to engage in a closing transaction and an option writer would remain obligated until expiration or assignment.
xi. If you do not have sufficient equity to meet the margin requirements for the exercise of an option, TBSPL may not exercise your option or may immediately liquidate the underlying security which results from the exercise of the option.
2. Warrants and CBBC on the Hong Kong Exchange
i. Issuer default risk
In the event that a structured product issuer becomes insolvent and defaults on their listed securities, you will be considered as unsecured creditor and will have no preferential claims to any assets held by the issuer. You should therefore pay close attention to the financial strength and credit worthiness of structured product issuers before you participate in trading this kind of product.
“Issuers Credit Rating” showing the credit ratings of issuers is now available under the Issuer and Liquidity Provider Information sub-section under Derivative Warrants and under CBBCs section on the official website of HKEx
ii. Uncollateralized product risk
There are no assets guarantee for uncollateralized structured products. In the event of issuer bankruptcy, you can lose your entire investment. You should read the listing documents to confirm if a product is uncollateralized.
iii. Gearing risk
Structured products such as derivative warrants and CBBCs are leveraged and can change in value rapidly according to the gearing ratio relative to the underlying assets. You should be aware that the value of a structured product may fall to zero resulting in a total loss of the initial investment.
iv. Expiry considerations
Structured products have an expiry date after which the product may become worthless. You should be aware of the expiry time horizon and choose a product with an appropriate lifespan for your trading strategy.
v. Extraordinary price movement
The price of a structured product may not match its theoretical price due to outside influences such as market supply and demand factors. As a result, actual traded prices can be higher or lower than the theoretical price.
vi. Foreign exchange risk
Your trading structured products with underlying assets not denominated in Hong Kong dollars are also exposed to exchange rate risk. Currency rate fluctuations can adversely affect the underlying asset value, also affecting the structured product price.
vii. Liquidity risk
The exchange requires all structured product issuers to appoint a liquidity provider for each issue. The role of liquidity providers is to provide two way quotes to facilitate trading of their products. In the event that a liquidity provider defaults or ceases to fulfil its role, you may not be able to buy or sell the product until a new liquidity provider has been assigned. There is no guarantee that the you could be able to buy or sell the structured product at the target price.
viii. Additional Risks Involved in Trading Warrants
a. Time delay risk
In the normal course of events, the value of a warrant will decay over time as it approaches its expiry date. Warrants should therefore not be viewed as long term investments.
b. Volatility risk
The price of warrants can increase or decrease in line with the implied volatility of underlying asset price. You should be aware of the underlying asset volatility.
c. Market risk and turnover
The price of warrants is also affected by its supply and demand in the market in addition to basic factors that decide the theoretical price of the warrants, in particular when the warrants are about to be sold out or new warrants are issued by the issuers. The turnover of warrants should not be considered as the basis of its value increase, and the value of warrants is also affected by other factors, such as the price of relevant assets and volatility, remaining time, interest rates and expected dividend.
ix. Additional Risks Involved in Trading CBBCs
a. Mandatory call risk
When trading CBBCs, you should be aware of their intraday “knockout” or mandatory call feature. A CBBC will cease trading when the underlying asset value equals the mandatory call price/level as stated in the listing documents. You will only be entitled to the residual value of the terminated CBBC as calculated by the product issuer in accordance with the listing documents. You should also note that the residual value can be zero.
b. Funding costs
The issue price of a CBBC includes funding costs. Funding costs are gradually reduced over time as the CBBC moves towards expiry. The longer the duration of the CBBC, the higher the total funding costs. In the event that a CBBC is called, you will lose the funding costs for the entire lifespan of the CBBC. The formula for calculating the funding costs are stated in the listing documents.
c. Trading close to the call price
When the price of the underlying asset is close to the call price, the price of a CBBC may become more volatile with wider spreads and the turnover may also be reduced. The CBBC may be called at any time, and the trading ceased. Since the mandatory call may not take place at the same time as the CBBC trading ceases, some trading may only be reached and confirmed by the participator of the relevant stock exchange after the mandatory call takes place. However, any trade being executed after the mandatory call event will not be acknowledged and will be cancelled. Therefore, you should be particularly cautious when deciding to trade CBBC at the price close to call price.