forward conversion

O

Option Trader

These were the results of a full market scan:

TS at $44 strike price for Dec 2006 offers a forward conversion opportunity, plus pays a dividend, 6.3% annual. next dividend on June 13th. = an interesting play for a conservative investor.

The question is if there's a catch to it.
 
I'm pretty sure a reverse conversion would not work because the stock is difficult to borrow. I believe it would not work with a conversion either, but maybe someone else with more experience can elaborate.
 
The quotes are stale, but TS is one of the stocks in which I quote all the vertical and time arbs in r/t. The options aren't indicating any arb opportunities in Dec, as one would expect.

The conversion/reversal arb is the most exploited. The stock pays $1.85 [6.3% pa] in dividends, and carry on the $44 strike is $1.40 [4.75% pa] through Dec. The forward should be valued at roughly $43.55 for parity on the arbitrage.
 
strike x rate x time +/- dividend

long rate plus dividend for conversion...long stock / short combo

short rate minus dividend for reversal...short stock long combo
 
Quote from chiguy:

strike x rate x time +/- dividend

long rate plus dividend for conversion...long stock / short combo

short rate minus dividend for reversal...short stock long combo
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ahhhhh...ohhhhh..thanks:) ...so thats what I've been doing:cool:
 
No, but you did do a good Riskarb LOL. Next time throw in some [dBrackets] here and there and we won't be able to tell the difference :)

I did detect a note of sarcasm in Aardvark's response....but it's hard to tell on these forums :D

Just in case, a KISS version for dummies like me:

Conversions and Reversals are locked positions.

Conversion = long stock + short synthetic stock.

Reversal = short stock + long synthetic stock.

Where synthetic stock is of course: long call + short put a.k.a a combo.

MoMoney.

Quote from chiguy:

hopefully i didn't come off as a smart-ass....:)
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yup...

you are arbing the cost of funds versus the physical position...

you are the bank...

also good to have long stock like in gm...

or a takeover with 51% front and 49% back end...

more about that later...
 
Quote from chiguy:

yup...

you are arbing the cost of funds versus the physical position...

you are the bank...

also good to have long stock like in gm...

or a takeover with 51% front and 49% back end...

more about that later...
More...

Nice call on GM. did u ring the register?
 
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