convertible bonds, for retail?

Discussion in 'Options' started by newguy05, Jun 16, 2010.

  1. Recently got moved around to the fid tech side at my 9-5, been studying convertible bond and it seems to be a very decent product. Since ET doesnt have a fixed income section and the conv bond mimics a derivative somewhat i will post it here.

    This is my understanding:

    - The conv bond is/behaves like a regular bond(debt) if stock is below the conversion price. You got your yield, maturity, and full repayment upon expiration, and it trades above/below par based off counterparty/rate etc..

    - If the underlying is above the conversion price, the value of the bond will increase in ratio with the underlying price.

    This seems like a excellent product in the current market, it generates cash flow even if the stock isnt performing, less risk, and latches on the gain if the stock gaps. You risk really is only counterparty for long term investors, and if default you are on the same pecking order as debt not share holders.

    My question is does anyone know how a retail can trade those convertible bonds? it's easy enough for institutional traders to do it or for retail to buy funds. But is there a broker that let retail buy company specific conv bonds directly?

    I looked around in interactive brokers doesnt seem to find anything. I would love to get my hands on some etrade conv bonds at below par with a conversion price of $15.

    If anyone got some actual trading experience with convertible bonds, please feel free to discuss.
  2. 1) Retail customers experience wider bid-ask spreads for bonds.
    2) If you have an account at eTrade, you may get better quotes for their convertibles.
    3) Instead of owning convertibles outright, you could merely split a portfolio between stocks, "vanilla bonds" and options to replicate the convert's behavior. :cool:
  3. pmg


    Hi, I know this is an old thread, but I am wondering about the third bullet point. How is it possible to mimic the convertible bond behavior with a vanilla bond and an option. Seems to me that the purchase price of the call option would be an additional cost, which eould not occur, when purchasing a convertible in the first place. Please explain, if I am mistaken here.

    It seems that eTrade has a pretty comrehensive bond desk, that allows also sceening convertibles. Are there any other good offerings? I have a tradestation account, but it doesn't seem to offer purchasing of convertible bonds.

  4. I think long call + long bond or preferred shares = synthetic convertible bond. Of course, the yield over the bond period has to be > premium paid for the calls, otherwise it probably doesn't make sense to do it. Can move the strikes of the calls up. Which is why most convertible bonds have pretty high strike prices.