forward conversion

Discussion in 'Options' started by Option Trader, May 3, 2006.

  1. 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.
  2. 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.
  3. 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.
  4. Could someone explain forward/reverse conversion...? so I don't have to look it up in McMillian/Natenberg:p
  5. 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
  6. ahhhhh...ohhhhh..thanks:) thats what I've been doing:cool:
  7. hopefully i didn't come off as a smart-ass....:)
  8. 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.


  9. 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...
  10. Nice call on GM. did u ring the register?
    #10     May 10, 2006