The past year and a half, the big money to be made in convertible bonds and notes is to buy the convertible
issue of a tech stock, and then short the common stock. You're protected on the upside, even if the stock
goes to the moon, and you can clean up as the common stock goes down.
The convertible can also obviously start going down, since there are credit, cash flow and debt servicing issues,
but the common stock normally erodes much more quickly and experiences a great percentage decline. Plus your
getting your coupon yield payments and so you're picking that up.
If the common stock goes down 70% and the convert goes down 15-20% that's still a nice return. stocks like
AMZN were great examples.
But those great plays are mostly over..... the better approach is to be looking for converts to buy.
An interesting twist is to be long the convertible and write at the money or slightly out of the money covered
calls, then look at it as a yield Play.... coupon yield + covered call premiums. when the VIX is high you could
probably create a synthetic return vehicle that yields 17.5 to 20% a year. Obviously you are not going to
hit any home runs with this approach, but just look at that Ball player in seattle with his 242 hits this year -g-
You've got to have an account with a fair bit of capital, because most brokerage firms are going to
use the naked call option writing margin requirements, even though, it's not from a technical perspective.
John |
