Cumulative Option Contract

Cumulative Option Contract

Cumulative option contracts are "hybrid" products that can be divided into Accumulator and Decumulator, which are a combination of a series of synthetic forward contracts. For Accumulator, investors will buy the relevant stocks at a specified price (lower than the Spot price) every day according to the contract, while Decumulator will sell the relevant stock at the specified price (higher than the Spot price) every day according to the contract. Both of the above would have a KO feature that the contract will be terminated immediately once the KO event occurs.

As for the options structure, for example Accumulator, is equivalent to buying call options and selling put options at the same time and all of those options are with KO feature.

Cautions and Main risks

  • Admission fee is high. Although the minimum investment amount depends on different counterparties, the requirement would be HK $ 2,000,000 or more normally;
  • If investors would like to early terminate the contract before expiration, they might have to pay unwind cost that is much higher than expected;
  • When the price of the underlying stock rises (falls ^), the contract held by investor may trigger the "Knock-out" event. Once triggered the "Knock-out" event, the relevant contract will be terminated immediately, and investor is no longer able to continue buying (selling ^) the stock at the specified price;
  • When the price of the underlying stock falls (increases ^), the investor buys (sells ^) the stock at the specified price, and the customer is obliged, may suffer loss as a result.
  • Specific terms can also be added to the cumulative option contract: if the price of the relevant asset falls (rises ^) through the strike price, the client must accept to buy (sell ^) two or three times the number of shares at the specified price.
  • If the counterparty breaches its obligations or becomes insolvent, might not be able to buy (sell) the shares at the specified price, and therefore, investors may lose the entire investment amount.
^Is a Decumulator

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