Global Macro Trading Journal

i am right. it is 140 LCC for each 100 AAMRQ.

the deal is quite complicated. for instance now the AAMRQ should trade around 14.00 (LCC = 23.60)

the delta is 140%. the reason is that the deal fixes/caps claims (constant c) and fix $LCC portion (28% of value) of the new AMR value. so it is like $LCC/0.28 - c - $LCC = $AAMRQ

taking first derivative with respect to $LCC value you get 0.72/0.28=2.57. this you adjust by the ratio of share counts which is about 210/397 = 0.53. therefore 2.57*0.53=1.36=136%

this was just a simple analytic. you should get the numbers precise and understand under what assumptions these calcs were done, e.g. here converts do not need to convert even when there are in the money ultimately...

p.s. of course on the exchange date(s) you will not get 1.4/1. you will get the ratio decided on the effective date(s) and the share action during the following 120 days after that...
 
can't you read Daal? ;)

AAMRQ is a leveraged play on LCC stock. it moves more that LCC so in order to have a delta hedged neutral (pair) position you need to buy less of it than you sell LCC... that is all that is to it.
 
Quote from dhpar:

i am right. it is 140 LCC for each 100 AAMRQ.

the deal is quite complicated. for instance now the AAMRQ should trade around 14.00 (LCC = 23.60)

the delta is 140%. the reason is that the deal fixes/caps claims (constant c) and fix $LCC portion (28% of value) of the new AMR value. so it is like $LCC/0.28 - c - $LCC = $AAMRQ

taking first derivative with respect to $LCC value you get 0.72/0.28=2.57. this you adjust by the ratio of share counts which is about 210/397 = 0.53. therefore 2.57*0.53=1.36=136%

this was just a simple analytic.
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I don't think what you've described is a simple analytic - you've used calculus which wasn't in the merger agreement in February.

I tend to agree with Daal, if we are talking about number of shares (not dollar values), then the number of AAMRQ shares should be larger than the number of LCC shares sold.

Yesterday AAMRQ closed at 12.00 and LCC closed at 23.52, with AAMRQ share price being 0.51 of LCC, or LCC share price being 1.96 of AAMRQ.
 
Quote from Daal:

Actually i think you are right. I confused myself because of the beta calculations, I wanted more LCC short because AAMRQ beta is so high (slope to LCC stock)

The right ratio would be 1.6 shares of AAMRQ for every share of LCC with a $ ratio $1 AAMRQ - $1.21 LCC

but if dpar is right then you got to short a little bit more of LCC
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Actually I think I wasn't right.

I think the JPM analyst may have it wrong, and that AAMRQ is not a linear function of LCC.

The Tom Sandlow article on Seeking Alpha describes it well in that the AAG preferred stock is like a series of LCC call options which expire 30/60/90/120 days after the merger closes.

Therefore in terms of dollars, one would short a small amount of LCC common stock, and short a large amount of LCC call options (at a strike of $15 probably).

The beta you describe in your above post is the delta of the LCC call options.
 
Quote from dhpar:

whatever.

i posted after a year or so but that was enough to remind myself that this elite website is really a waste of time.
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I don't plan to hold through the distribution period. The JPM formula and the beta might be better for me because the formula might create a self-fulfilling prophecy (for better or worse) and the beta is already based on trading data
 
Quote from Daal:

My returns have been as follows (These the type of returns that I consider the only ones worth talking about, that is returns 'on networth including primary residence')
2007 -9%
2008 +30%
2009 +20%
2010 +22%
2011 +7% YTD
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Fine, but these numbers do not say anything about the maximum drawdown you had to endure to obtain these results.

For example, making 20% a year is good, but if you had to go through a huge 85% drawdown to make that 20% now that's an entirely different story.
(sorry if you already answered that question elsewhere, I cannot possibly go through almost 900 pages to find out)
 
Quote from m22au:

Actually I think I wasn't right.

I think the JPM analyst may have it wrong, and that AAMRQ is not a linear function of LCC.

The Tom Sandlow article on Seeking Alpha describes it well in that the AAG preferred stock is like a series of LCC call options which expire 30/60/90/120 days after the merger closes.

Therefore in terms of dollars, one would short a small amount of LCC common stock, and short a large amount of LCC call options (at a strike of $15 probably).

The beta you describe in your above post is the delta of the LCC call options.
More...

I'm not sure these theoretical values will matter for those wanting to hold for a few weeks gunning for a quick 10-15% profit. Most trading AAMRQ will use the JPM formula even if it is wrong.
By using a figure between JPM's and the beta I think I will be protected against a big tank in these stocks.
My guess is that the "correct" ratio, the number that will avoid underhedging and overhedging is between the 2 figures.
If you disagree, I would like to know why
 
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