The Hedge Funds Weblog
Hedge fund naked put selling
Wild stories and rumors from london to new york and around the world. Hit hedge funds these last two weeks . Which intern has opened prying eyes in a field that likes to hide.
And we look at the dead ends, funds are hitting below:
The debt downgrades of GM (ticker: GM) and Ford (F) helped trigger both the recent decline in stocks and the widening in credit spreads, or yield differentials, which helped drag down convertibles prices.
Hedge-fund selling caused the most dramatic valuation collapse," largely because of the unraveling of convertible-arbitrage strategies employed by these funds. In their most basic form, these strategies involved purchasing a convertible and simultaneously selling short the underlying common stock against the call part of the convertible. In order to capture the fixed-income portion while hedging the equity risk.( many funds try to magnify returns with leverage).
But in the real world of trading, they are just selling Naked puts. ( buy a Stock, sell its call = naked put )
..And yes hard to believe , but 90% of the managers who do these trades don't seem to understand… This is the reason we saw selling the last few weeks, in the big caps who have a large amount of Convertibles.
Because If your naked the put , you must sell to protect your position.
Convertibles are hybrid securities, either bonds or preferred stock, that can be exchanged for a predetermined number of common shares( Bond and Stock Option combined ).This lets an investor participate in stock-price changes, but with the yield and greater security of a fixed-income instrument.
No Comments