Vishnu, it seems that you have done your homework. If as you say, the company is bound by a legal responsability to pay the dividend, then it is worthy of the risk.
While your plan seems pretty logical on the surface, I should point out that it isn't possible to short a stock under $5. CNC common in therefore non-shortable.
According to the original version of Reg T (1934), it's not legal to short a stock under $5. A couple years ago Reg T was ammended, and margins dropped to 25% from 50%. Maybe the 'no shorts under $5' part of Reg T was changed too? That's the only explaination I can come up with.
Has anybody here actually shorted a stock under $5? If so, which broker allowed it? Anybody know if Schwab allows this?
Molon writes: According to the original version of Reg T (1934), it's not legal to short a stock under $5. ______________ Reg T says its not legal to short a stock that is not marginable. The SEC determines which stocks are marginable although a broker may impose additional restrictions, for instance if a stock is thinly traded. Usually, if a stock is under $5 the SEC will classify it as non-marginable. If a stock consistently trades above $5 and slips below $5 it may still be marginable if the SEC has not reclassified it as "not marginable". The broker may still say you can't short it. But it is legal to short it. I have never shorted a stock that is under $5. Until recently I have not had reason to but now I am looking more into it.
Why short a $2 stock,your profit potential is limited to $2 while your risk is unlimited(in theory).Most shareholders end up with squat after bankruptcy,few exceptions. If you want the play play the bonds,at least maybe you end up with equity via re-org.
i guess the point is to play the bonds and hedge the risk by shorting the stock. If the stock is below $5 two things happen: a. the bonds have a great yield b. if you play the bonds you risk getting nothing (or waiting for a bankruptcy restructuring which could take years). I'd like to lock in the great yield by find the appropriate ratio to hedge by shorting the common. This discussion came up because I've been looking at playing the CNC preferred with a 25% yield and hedging by shorting the CNC common, which is below $5.
Partly true..... As stocks under $5 are marginable and you need to be able to use margin to short..... But.......Professional firms aren't held under Regulation -T. This means we can short stocks under $5. I've done it quite often, and have never had a problem Robert