CDS For Retail Investors
EN
(King Kong, 1,122
Points)
on 2/23/11 at 5:51pm
Looks like the day is coming soon when retail investors can purchase CDS. I've been waiting for this day for a while. Lots of companies I'd like to short but borrow can be a pain and premiums on puts are often too high. They will began trading on 3/8 and are called Credit Event Binary Options (CEBOs) that essentially work like CDS and pay $1000 upon a bankruptcy event. I am very excited to stock up on some MBIA CEBOs





I think only a few names are
I think only a few names are being offered in March: AK Steel, Advanced Micro, American Axle, Hovnanian, Huntsman, MBIA, and Tenet Healthcare. It should increase transparency in the market and reduce margins for CDS desks at banks.
Can I ask why you think the
Can I ask why you think the premiums on these will be meaningfully lower than the premiums on puts? I don't know much about CEBOs but I am not sure why they solve the problems related to shorting for retail investors that you mentioned.
There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
Premiums will be lower
Premiums will be lower because we are talking about a credit default and not simply the stock moving lower before expiration. Being a binary option it is either worth $1.00 or $0.00 on expiration which is different than a vanilla put option
iambateman wrote: Lots of
Lots of companies I'd like to short but borrow can be a pain and premiums on puts are often too high
No panacea for that here.
Kenny_Powers_CFA wrote: Can I
Can I ask why you think the premiums on these will be meaningfully lower than the premiums on puts? I don't know much about CEBOs but I am not sure why they solve the problems related to shorting for retail investors that you mentioned.
well theres no cost of borrow like there is for outright short a stock. depending on the duration of the cebo vs the put, i would assume the cds payments would be less than the cost of a put. not to mention put costs are all paid upfront while cds costs are spread out over the duration of the contract. also not part of my original argument but since you dont have to worry about strikes and id assume initially most would be 5 years in length, they should in theory be more liquid
it looks to me as if the cost
it looks to me as if the cost of this security is going to be paid upfront. it's not an actual CDS...
and after it's originated, the price of these contracts will still trade up and down depending on the market's perceived risk of default (like an option trades up and down). it's going to be sort of like an equity put option with a really low strike and an unusual payout feature. you're still going to have to pay the option premium.
you're not going to have increased cost of borrow like you'd have with a stock that a lot of people are trying to short, but the cost of these contracts is going to increase when a lot of people are trying to buy them. it will probably alleviate some of the cost of getting short exposure just because the supply of stock to short is finite and the supply of these contracts is potentially unlimited, but i don't think there's a free lunch here.