Reverse Convertibles

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Oct 12, 2006 10:50 am

Anyone having success with this strategy?  Its been pretty popular and profitable the last two years. They work well in a sideways market.  Though it depends on the security. 

Oct 12, 2006 11:58 am

I have been looking at implementing them as well.  Pitched them to an UHNW client of mine, and he balked because of the "risk/reward ratio."


Oct 12, 2006 7:12 pm

BankFC:

I have been looking at implementing them as well.  Pitched them to an UHNW client of mine, and he balked because of the "risk/reward ratio."


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Yeah, his risk - your reward!.....just kidding.


I've looked at the reverse convertibles, but as is my nature, I'm just looking.

Oct 13, 2006 9:53 am

I know you're kidding.


In reality, he was referring to the limited upside of the coupon with the downside of the underlying stock going below the downside protection percentage.


Just haven't been able to make a case for one yet...

Oct 19, 2006 9:14 am

tanman- as an alternative investment this has been a very effective solution for many HNW clients because it's something different and intriguing. I don't see why you wouldn't be able to effectively demonstrate the value of this strategy as a compliment to your other solutions.

Oct 19, 2006 9:22 am

They're actually covered call writing.

Oct 19, 2006 9:54 am
haRDcorp:

tanman- as an alternative investment this has been a very effective solution for many HNW clients because it's something different and intriguing. I don't see why you wouldn't be able to effectively demonstrate the value of this strategy as a compliment to your other solutions.



Different and intriuging, and pay a nice commish to the broker on the new offering.

They are also generally priced very inefficiently in the aftermarket because almost nobody trades them.

And ultimately-do they make money for the client? Yeah I know, that question is such a nuisance, right?

Personally, I used them a few times about 4 years ago.  Decided that anything with that many moving parts was far too complicated to try to value versus a proprietary desk trader.

Oct 19, 2006 1:38 pm

I agree with all.  I have used them several times and they worked out.  Stock traded in a tight range.  ROI was 11% for a 9 month term.  No knock-in events. 


The firms perspective in providing these "structured products" is what fascinates me.  They research a stock that they feel has limited downside (technical and fundamental) with possible catalyst near term for major upside, then sell out of the money calls, buy puts, usually 30% below last price when issued.  The firm makes a killing on these things. 


Some look interesting, some look awful. 


Seems to me that simple covered calls would work better.