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Strategies & Market Trends : Convertible Hedge investors?
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To: chevalier who wrote (49)1/27/1998 1:03:00 PM
From: Ted S  Read Replies (1) of 107
 
Hi Ari and Scott Mc,

Let me see if I have the critical factors for full hedges:

1. Pick low premium situations. The lower they are, the less chance of going lower later if you close the hedge.

2. Pick high interest rate differences between bond and common. Maximize interest stream.

3. Pick low bond prices. At least below parity. Maximize bond appreciation to face value.


Long term strategy: buy and hold.
a. Wait until expiration.
b. Profit from:
- stream of interest payments.
- rise of bond to face value.

Short term strategy: close hedge during favorable conditions.
a. Wait for stock price to drop. Premium jumps.
b. Profit from:
- Close hedge at profit from opening position.
- Income from interest stream.

The only problem with the short term strategy is that after closing the hedge, you have to be able to jump into another hedge that has an ROI equal to better than the first one. Could be tough if the pickings are scarce.

Have I missed anything guys?

Ted
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