Volatile financial markets provide ample opportunities for short-term traders to profit if they can capture the movements in the market. While long-term investors will need to ride out the ups and downs of the markets (some may even choose to invest more when markets are down), short-term traders can choose to be more active by trading in either direction of the market.
One instrument on the Singapore Exchange (SGX) that can be used for short-term trades is Daily Leverage Certificates (DLCs). Introduced to the Singapore Exchange (SGX) by Societe Generale, DLCs are a type of derivative that offers investors fixed daily leverage exposure to stocks or indexes that the DLC is tracking. With DLCs, traders can make a profit in either direction of the market.
DLCs derive their value from the underlying assets they are tracking, as opposed to investing in the assets itself. When buying a DLC, traders are exposed to the daily price change of the underlying assets that the DLC is tracking. Read more here on how DLCs can be used in volatile stock markets.
It’s important to note that DLCs are for sophisticated investors who want to trade actively and are keen on using leverage for their trades. The use of leverage means that while gains will be higher if prices move in the right direction for the trades, losses would likewise be magnified. However, with DLCs, there is no risk of a trader losing more than their initial capital. As such, only SIP-qualified investors can trade DLCs on the SGX.
On 1 June 2022, Societe Generale launched a new set of DLCs that tracks the performance of the Straits Times Index (STI). The STI comprised of 30 of the largest and most liquid companies listed on the Singapore Exchange (SGX) and accounts for nearly 80% of the entire value of all listed companies on the SGX.
Long DLCs For STI: STI 2XLongSG250529; STI 5XLongSG250529; STI 7XLongSG250529
Traders who think the STI will increase in the short-term can choose to trade via a long DLC. They can opt for different leverage options to determine the level of leverage they wish to use.
STI 2XLongSG250529: This long DLC (i.e. traders make money if prices go up) provides 2x leverage exposure. This means if the STI goes up 2% within a single day, the DLC will generate a return of 4% for the day. The issue price for the DLC was $1.50.
STI 5XLongSG250529: This long DLC provides 5x leverage exposure. This means if the STI goes up 2% within a single day, the DLC will generate a return of 10% for the day. The issue price for the DLC was $1.20.
STI 7XLongSG250529: This long DLC provides 7x leverage exposure. This means if the STI goes up 2% within a single day, the DLC will generate a return of 14% for the day. The issue price for the DLC was $1.00.
The long DLCs vary in terms of how much leverage exposure a trader will get. Traders choose a 7X Long DLC if they want higher daily fixed leverage exposure, and a 2X Long DLC if they want lower leverage exposure.
Short DLCs For STI: STI 2XShortSG250529; STI 5XShortSG250529; STI 7XShortSG250529
For traders who think that the STI will decline, they can choose to trade via a short DLC.
STI 2XShortSG250529: This short DLC (i.e. traders make money if prices go down, and lose money when prices go up) provides 2x leverage exposure. This means if the STI goes down 2% within a single day, the DLC will generate a positive return of 4% for the day. Issue price for the DLC was at $1.50.
STI 5XShortSG250529: This short DLC provides 5x leverage exposure. This means if the STI goes down 2% within a single day, the DLC will generate a positive return of 10% for the day. Issue price for the DLC was at $1.20.
STI 7XShortSG250529: This is a short DLC that provides 7x leverage exposure. This means if the STI goes down 2% within a single day, the DLC will generate a positive return of 14% for the day. Issue price for the DLC was at $1.00.
Similar to the Long DLCs, the short DLCs vary in terms of leverage exposure a trader will get. Traders choose a 7X Short DLC if they want higher daily fixed leverage exposure, and a 2X Short DLC if they want lower daily fixed leverage exposure.
Read Also: US Daily Leverage Certificates (DLCs) On SGX: NASDAQ-100 Index; S&P 500 Index
The returns offered by the STI DLCs are designed such that it tracks the daily performance of the STI. This means that for traders who buy and hold an STI DLC beyond a single day, returns may deviate from the 2x, 5x or 7x that the DLC is supposed to generate.
The price of the STI DLC will rise or fall accordingly depending on the STI returns for that day. For example, if the STI increase by 2%, a 7x Long DLC should go up by 14% for that day. If the price was $1.00 at the start of the trading day, it will close at $1.14. However, this doesn’t necessarily apply if the 2% increase occurs over multiple days, as opposed to a single day.
Besides the STI DLCs, there are many other DLCs that are offered on the Singapore, Hong Kong and US markets such as the Hang Seng Index (HSI) and Hang Seng TECH Index (HSTECH) in Hong Kong, and the NASDAQ-100 and S&P 500 index in the U.S. Check out the complete list of DLCs offered on the SGX via the Societe Generale website.
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