Ever since CIMB Investment Bank launched CBBC (Callable Bull and Bear Contract) in Bursa Malaysia recently, Malaysian investors who bought these instruments on the first days of trading must have learnt some painful lessons.

Such lessons include buying CBBC with credit card like finance charge(as in GAMUDA-JA) and not realizing the automatic call feature upon triggering Mandatory Call Event (like in BJCORP-JA).

There are some factors investors should look at before deciding to buy CBBC.  The first thing they should look at is the call price of the instrument.  Call price is very important because when the share price touches the call price, the CBBC dies.  It is therefore important to select a CBBC with a call price that is some distance away from the current share price.  Another point to note is that contrary to warrants, high volatility is no good for CBBC.  Warrants buyers benefit from higher volatility because it increases the probability of the warrants being in-the-money.  The pricing of warrants is such that its price should be higher when there is a surge in volatility.

The opposite is however true for CBBC.  When volatility of share price increases, the probability of share price touching the call price increases, thereby triggering a Mandatory Call Event which will mean the end of the CBBC.  Investors should hence avoid buying CBBC if they anticipate a spike in volatility of the underlying asset.