Reason to issue more than one DLC
Usually the reason to issue more than one product on the same underlying asset, direction and leverage is because the price sensitivity of existing products are getting lower due to their low unit price. The new products will provide investors with higher-sensitivity options, which is more favorable for short-term trading.
How to differentiate between the existing and new DLCs
For index DLCs, investors can differentiate between the existing and new DLCs by their expiry date as indicated in the counter name and by their stock code. The new products will have a longer dated expiry.
For single stock DLCs, apart from the difference in stock code, a letter (“A”, “B” and so forth) will be added to the new product name for easy identification. For example, the name of the new 5x Short DLC on Tencent is “DLC SG5xShortTencent A”. Investors can also go to SocGen’s website https://dlc.socgen.com to check the difference in expiry date.
What are the differences between an “expensive” and a “cheap” DLC, if everything else (Underlying Asset, Direction and Leverage Factor) is the same?
These “cheap” DLCs might look attractive as investor can buy more shares with the same capital outlay.
In fact, the theoretical percentage movements between high and low priced DLCs are the same. (If a stock goes up by 2%, 5x Long DLC originally at 0.05 will go up to 0.055 while 5x Long DLC originally at 0.5 will go up to 0.55, both up by 10% before costs and fee; If a stock goes down by 2%, 5x Long DLC originally at 0.05 will go down to 0.045 while 5x Long DLC originally at 0.5 will go down to 0.45, both down by 10% before costs and fee)
Moreover, such low-price DLCs have the following disadvantages:
1. Bid ask spread is large on low-price DLCs. Taking a DLC at SGD 0.01 as an example, the minimum possible bid/ask spread is 0.001. For a DLC that is worth 0.01, the minimum bid ask spread is 10%. The lower the DLC price is, the larger the minimum possible spread is.
2. As a result of the big bid ask spread, the DLC will become insensitive to underlying stock/index movement. In a day where the Underlying Asset movement is mild, DLC bid/ask quotes may remain unchanged for the entire trading day due to the insensitivity.
3. As DLC theoretical bid price drops below minimum possible order price (0.001), issuers will not be able to provide both bid and offer.
DLC is not a stock. Investors will not be better off holding more shares. Both high and low-priced DLCs have the same leverage factor and move by the same theoretical movement compared to the Underlying Asset, be it 3, 5 or 7 times, Long or Short. However, investors should take note that there are some disadvantages in trading low-price DLCs.
Because of the above, when faced with DLCs with the same Underlying Asset, Direction and Leverage Factor, investors are advised to choose the higher-value DLC.
What will happen to the existing DLCs
Despite the difference in price, sensitivity and expiry date, investors should note that both the existing and new products will move by the same theoretical percentage movement. For DLCs that are below certain value, DMM will keep the same market making quality on the bid side but may reduce the offer size.