Equity Securities Trust I (XCT) is a convertible preferred security created by ATT to monetize its equity stake in Cablevision (CVC) and automatically converts into CVC shares on Nov. 15 2004. XCT has a dividend of $2.3432/share, which comes to around 11% now. So how about being long SCT and short CVC to simply lock in the fat yield? Am I missing something?
Babak, Do you know what the conversion option is? If the option is fixed let's just say 1 to 1. The the only risk I would see is if the dividend was cut or not paid, similar to MCIT. In this case hypothetically both xct and cvc could go to zero so the cost is commission and time value. However, if the conversion is a function of price or some other weird ratio then a divergence where cvc rises above xct in price you could be caught short with less of a hedge than is necessary to cover the short. This does look like an interesting play.
there are armies of geeks with supercomputers spending 18 hours a day looking for "risk free" opportunities. the big boys don't know how to handle true risk and they suck at pure trading, but they do know how to crunch numbers and throw money at PhD's like confetti- which is why they dogpile any arbitrage opportunity about three seconds after it comes into existence. in otherwords, i skeptically submit that if this really is a "risk free" opportunity, then it's already gone. and if there is hidden risk in there somewhere, then it's just another trade.
darkhorse, I agree with you but until I find something proves this trade has unreasonable risk or simply won't work, I won't pass it up. Lets not be so rational that we will pass by a $20 bill lying on he ground because "logic dictates that if it truly was there someone else would have already picked it up".
Don't have the specifics handy, but I believe the conversion ratio is variable based on CVC price tiers. So it may not be as simple as just buying XCT and shorting CVC. Besides, as someone already noted. If it was really a good deal, the arbs would have already jumped all over it and eaten it up. You'll have to pull the SEC docs to get the specifics of the conversion rules and then do the math.
They could cancel the dividend which would make the position worthless. Of course, no one in the market would pull a dirty trick like that LOL. Also I hear some convertible securities are not marketable or only marketable outside of the US as a condition(SEC condition) of their issue so as to encourage the holders to keep them until they are converted, so they might be really hard to unload before they convert, and if CVC skyrockets you could end up with some huge margin calls and have your money tied up for years. And of course, no dividends in the meantime. I'm just a novice though. Can't say this for sure but sounds risky to me.
http://www.sec.gov/Archives/edgar/data/1111630/000095012301507346/y5351197e497.txt Wade through that and get back to me
I do not know the specifics of the conversion, but those trades exist all the time and just because someone else jumps all over it doesn't preclude you from doing it. If the popular view is that it cannot be done; then you should be doing it ...