Possibility for an individual to engage in convertible arbitrage?

Discussion in 'Options' started by Rudolf13100, Jun 21, 2009.

  1. Dear All,

    I am wondering if an individual investor can engage in convertible bonds arbitrage or if there are barriers of entry impeaching one to do so (such access to greeks data, material needed, or else).

    I have put this thread in this option forum due to the option impied in a convertible.

    I will greatly appreciate your insights.

  2. I really don't know anything about what you're talking about :)

    In general, there are no free lunches for individual investors. If there's a profitable arb there, someone a lot higher up is usually scarfing it up.

    OK, I'm going back to twirling my cowlick...
  3. The answer to your question, as far as I am aware, is no. Convert arb is not for individual retail investors, as they lack the scale needed to participate in the mkt.

    Your best options are to either go with converts funds offered by the likes of Fidelity and Vanguard or to find some way to go long the HFRXCA index.
  4. bebpasco


    There are many barrier's of entry for the small investor.

    First, you'd have to construct a zero-coupon curve to properly value the interest rate component of the bond. It's particular tough when there are little if any market traded instruments over the interest rate curve of the company.

    Second, you have to properly identify and value the imbedded options in the bond. Many bonds have more than one option and the pricing of each is sometimes co-dependent. These options are usually long dated and are priced over-the counter (OTC). Most, if not all, retail investors do not have access to the OTC market. Using exchange traded options as a proxy for OTC imbedded options is a fools errand.

    Third, trade size is an issue for the retail investor. Most retail traders deal in $1000 face value lot sizes. A "small" institutional trade is $10 million face value. Depending upon the size of the trade, arbitraging a conv. bond with all the transaction costs could wipe away any anticipated profits --- and that's assuming you've priced the components correctly.
  5. Thanks for your replies.