What are Daily Leverage Certificates (DLCs)?

Important:

Daily Leverage Certificates are Specified Investment Products (SIP) which have structures, features and risks that may be more complex. They are designed for short-term trading and are for investors who are willing to accept the risk of substantial losses up to the principal investment amount, possibly within a very short time frame.

What are Daily Leverage Certificates (DLCs)?

Issued by Societe Generale and listed on SGX Securities market, the DLCs offer investors leverage exposure to a wide range of underlying indexes and single stocks:

• Singapore Stock Indexes & Single Stocks
• Hong Kong Stock Indexes & Single Stocks
• *New* U.S. Stock Indexes

All the DLCs are traded on SGX and denominated in Singapore dollars (SGD). Therefore, you can gain exposure to Hong Kong listed stocks using the DLCs without having to change your SGD to HKD. Investors can also now trade the US markets during Asian hours with the new launch of Long and Short DLCs on US indices.

How do DLCs work?

The DLCs are designed to provide 5 or 7 times the return of the daily performance of the underlying asset on a close-to-close basis.

Source: DLC.socgen.com

Let’s look at a Long DLC calculation, for example assume you bought 10,000 units of Geely Long DLC (DOLW) before the close yesterday at S$0.69, which is also the end of day intrinsic close value of the DLC. You then sold the DLC at S$0.835 the next afternoon when the value of the DLC rose by approx. +20%, corresponding to 5 times that of the +4% gain on Geely share price. Your profit on DOLW is therefore S$1,450 before brokerage and exchange fees.

Source: DLC.socgen.com

Let’s look at a Short DLC calculation, for example if instead you had bought 10,000 units of the Geely Short DLC (DSHW) before the close yesterday at $0.465, which is also the end of day intrinsic close value of the DLC. You then sold the DLC at $0.375 the next morning when the value of the DLC fell by approx. -20%, corresponding to 5 times that of the +4% gain on Geely share price. Your loss on DSHW is therefore S$900 before brokerage and exchange fees.

Source: DLC.socgen.com

Remember, the Long DLC will gain in value when the underlying stock rises while the Short DLC will fall in value. And vice versa the Short DLC will gain in value when the underlying stock falls while the Long DLC will fall in value.

Note that if you buy and hold the DLC overnight, there are overnight Cost and Fees that are factored into the DLC intrinsic close value published daily on the website after market close. If you buy and sell during the day, there is no overnight Cost and Fees but you still have to take into account bid/ask spread, brokerage and SGX fees.

Why should I buy the DLCs instead of directly buying the underlying stock?

First, the DLCs offer LEVERAGE for short term traders to enhance their potential return. The DLCs offer up to 5X leverage for single stocks and up to 7X leverage on indices.

For those who trade the SGX listed blue chip stocks, these stocks are usually less volatile, perhaps fluctuating around 1 to 2% a day but using the 5x DLCs, your return can potentially go up 5 to 10% a day before cost and fees. On the other hand, your losses can also be magnified hence it is important to manage your risk when trading with leverage.

Source: DLC.socgen.com

Second, the DLCs offer the flexibility to trade both LONG and SHORT directions. You can use the Long DLCs to express your bullish views on the underlying asset while the Short DLCs allows you to express your bearish views on the underlying asset.

Having an instrument that allows you trade both directions of the trade will come in useful in times of volatility. For example, if you would like to hedge your long-term investment portfolio against a near term market correction, the Short DLCs would enable you to achieve returns when the market corrects to offset your losses on your long-term investment portfolio.

Source: DLC.socgen.com

Lastly, DLCs offer you exposure to the underlying stock using a FRACTION OF THE COST OF BUYING THE ACTUAL UNDERLYING STOCK. 

For example, to gain exposure to Tencent stock, you could use the 5x Long DLC on Tencent that is currently priced around S$0.50 and you can buy them in increments of 100 units. This beats the minimum investment sum of buying the Tencent stock which works out to be around ~HKD 33,700 or ~S$ 6000 (Tencent stock price of HKD337 x Minimum lot size of 100 units). Using the DLC would therefore be ideal if you intend to average into Tencent in multiple tranches or intend to put less than S$ 6000 in Tencent.

To achieve the same S$7000 exposure to Tencent, you could buy approx. 28,000 units of the Long DLC on Tencent at a price of $0.50 at a total investment sum of $1,400. This is because with the 5 times leverage, the investment sum of $1,400 would be equivalent to a notional exposure of approx. S$7,000 notional exposure to Tencent stock price movement.

By using less capital, your transaction costs such as broker commissions and exchange fees would also be lower and that is ideal if you’re an active trader.

Source: DLC.socgen.com

Where can I find more information on DLCs?

Before you decide to use the DLCs for your short-term trading, it is important to understand the product features such as compounding effect and airbag mechanism, as well as the risks of trading the DLCs. You can find out more on Societe Generale’s DLC website DLC.socgen.com or UBS Education website DLC.ubs.com/en/education