Most technology stocks in Hong Kong were red last week. They continue to be beaten down even after China’s call for support of overseas listings and the end of her tech crackdown in mid-Mar 22.
Here’s what the chart of the Hang Seng Tech Index (HSTECH) looks like.
Do you remember that DLCs work fantastically well in trending markets?
After reading Part 1, you’ve understood how DLCs work to discover opportunities that you can take advantage of.
In this part, you’ll discover how to choose a suitable DLC and the trading strategy you can use to take advantage of DLCs.
Let’s use Alibaba (9988) as a case study throughout this article.
Are you ready?
Where To Get The Information To Select The Right DLC?
You’ll want to have a look at the different DLCs that are available on Alibaba (9988).
This piece of information and more can be found on Societe Generale’s website.
Once you’re at the website of Societe Generale, hover your cursor over Products followed by clicking on Charts.
As we are using Alibaba (9988) as a case study, let’s search for DLCs on Alibaba (9988) using the drop-down box and click on it.
As you scroll down, you’ll see a DLC table named “Related Daily Leverage Certificates”. Let’s unpack the details you can get from this table in the next section.
How To Read The DLC Table?
Let’s have a quick quiz. Are you able to read the name of each DLC?
This image below from Part 1 will help you to read the name of any DLC.
Great! Let’s unpack the 1st and last columns titled “Most Sensitive” and “Sensitivity” respectively.
Do you see 2 stars in the 1st column?
Those stars are placed by Societe Generale to bring your attention to the most sensitive DLCs.
How do you tell the sensitivity of each DLCs?
This is where the last column enters the picture.
The smaller the figure in the last column, the more sensitive the DLC is to its underlying, Alibaba (9988), in this case.
Looking at the 1st row of the last column, you’ll see that the sensitivity of Alibaba’s (9988) DLC is 0.055. This translates to needing the share price of Alibaba (9988) to move just $0.055 for its DLC to move by 1 tick.
Conversely, the DLC in the 2nd row isn’t as sensitive as it has a Sensitivity score of 24.695. This indicates that the share price of Alibaba (9988) needs to move by $24.695 for its DLC to move by 1 tick.
The 4th and 5th columns show the bid and ask prices for each DLC.
It’s always advisable to buy a DLC which has a tight bid/ask spread to avoid starting off losing a lot more from the start.
That’s all you need to know from the DLC table! It’s pretty simple, right?
Choosing The Right DLC To Buy
You know how to interpret the name of DLCs, compare the sensitivity of DLCs, and read the bid/ask spread of DLCs. Are there other things you should look out for to help you select the right DLC to buy?
Let’s say you decide to take a deeper look into the 1st DLC (marked out in the image below).
Simply click on the name of the 1st DLC and you’ll be brought to its product page, as shown below.
What are the important data that you’ll want to pay attention to?
#1 Outstanding Quantity
An outstanding quantity of 100% means that the DLC has been sold out.
On the opposite end, an outstanding quantity of 0% means that there’s ample stock for that DLC.
You can find this information under the heading “Trading Data”, highlighted in the image below.
There are 3 main fees that you need to know, especially if you’re holding the DLC overnight. You can find these fees near the bottom of the page, marked out for you.
#3 Legal Documents
Yes! This is a must.
No matter how boring these documents are, it’s highly advisable for you to read and understand what you’re investing in.
You can find the legal documents near the end of the page (marked out for you).
#4 Educational Materials
Test your knowledge and understanding by going through the educational materials that Societe Generale has completed for traders like us!
You can access the educational materials at the bottom of the page.
Once all that’s done, it’s time for the exciting part – the strategy you can implement using DLCs.
Strategy To Use To Trade DLCs
Though you can use DLCs on slow moving underlying assets, DLCs are best used on fast moving or volatile underlying assets. Think of opportunity costs!
Does a familiar trading strategy come to your mind?
Yes, you can apply The Art of Explosive Profits framework (AEP for short)!
Using this strategy will help you to capture magnified gains from explosive moves.
Imagine if you’d bought a 5x Short DLC on Alibaba (9988) and the price of Alibaba (9988) dropped by 1% within a day. You’ll be making approximately 5% within a day!
What will you learn from the AEP course?
In the AEP course, you’ll be coached on how to search for strong stocks instead of relying on news and hear-say.
You’ll also become fluent in reading charts to shortlist stocks that are about to have an explosive move.
Finally, you’ll learn how to identify the optimized entry and exit points to capture these explosive moves that you’ve been waiting for (in a safe manner, of course)!
Have a look at the AEP course and add this explosive trading strategy to your arsenal to seize more trading opportunities.
4 Things You Must Remember
#1 Societe Generale’s website contains all the information you’ll need on DLCs
#2 Sensitivity is key to shortlisting DLCs to trade
#3 There are 4 other important things you must look at before trading DLCs
#4 DLCs are great instruments to apply the AEP framework on
Here’s What You Can Do To Improve Your Trading Right Now:
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