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.
Could someone explain forward/reverse conversion...? so I don't have to look it up in McMillian/Natenberg
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
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 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.
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...