Hi TE,
"Long" means to own something, TE. "Short" means to have sold something that you do not own with the attempt to buy it back at a lower price.
The "long" convertible debentures, "short" common stock trade is well known in arbitrage circles.
When you are "long" the converts, you receive income from the interest payments, When you are "short" the stock, you receive income from the interest credit that you have provided the broker by effecting a sale that puts *cash* on the broker's balance sheet. Thus, you collect interest on both sides of the trade.
If the stock rises, *both* the "long" and the "short" go up in price, so you are hedged.
If the stock falls, the *short* (common stock) declines by a greater degree than the "long" (the debentures), thus greatly increasing your profit.
It is essentially a carry trade, where you make money on the interest differential, which in this case is very high because Simula common shares pay no dividend whatsoever. And, if you are very lucky (while in this trade), the stock declines and you make extra capital beyond the interest/dividend spread.
I hope this is helpful. |
