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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: forceOfHabit who wrote (56329)	9/14/2006 4:33:48 PM
From: YanivBA	Read Replies (1) \| Respond to of 116555

Thanks foh! I think I got it. That makes debt/equity a lot more clear to me. Where did you learn this stuff? When would you sell a put? When the implied vol of the put was too high. If I understand correctly the implied volatility would be high if the put is far out of the money and that would be when enterprise value is still far from the value of the outstanding debt. As enterprise value comes near the value of the outstanding debt this trade experiences diminishing returns because the implied volatility goes down. This is really like saying that this strategy is only good if the company does not default because any down side to the bonds from the "bond floor" and down would not be covered by the stock short position. Did I understand correctly? That would suggest this strategy would be well complemented by buying a CDS contract insuring from default. That is if the CDS is cheap enough. Whether the CDS is cheap because of counter party risk is another matter. YanivBA