Convertible Bond Discount Arbitrage and Deep Out-of-the-Money Setups

Summary

The research note examines two convertible bond approaches: buying bonds trading below conversion value and positioning in deeply out-of-the-money bonds. For discount arbitrage, it proposes buying the bond and shorting the underlying stock where feasible, expecting the discount to narrow as conversion becomes available or during the conversion period. It reports historical thresholds and returns, including separate equal-weighted and volume-weighted results, but gives no detailed methodology or transaction cost assumptions in the supplied summary.

The second approach seeks gains from possible conversion price reductions or put provisions, with an exit after a stated bond price rise. The note reports that returns in these setups mainly came from bond price rebounds; the conversion-price reduction and put-related trades generally lost money, and the timing of corporate actions is uncertain. These are historical study results, not guaranteed outcomes. Short availability, execution, liquidity, and the study’s assumptions could affect real-world performance.

Key ideas

• The note proposes pairing discounted convertible bonds with short positions in their underlying shares where feasible.
• It gives separate discount thresholds for bonds before and during their conversion periods.
• Deep out-of-the-money bond positions aim to benefit from possible conversion price cuts or put provisions.
• Reported gains in the out-of-the-money study mainly came from bond price rebounds, while the catalyst-specific trades generally lost money.
• The historical results depend on study assumptions and do not ensure future performance.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.