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
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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 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
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
No panacea for that here.
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.
Buying CDS or Shorting Sovereign Debt as a Retail Investor (Originally Posted: 01/25/2012)
First off, apologies if this is the wrong section for this question (the Asset Management forum doesn't get as many views so figured I'd start here first since traders may know the answer)... I've been a member for a few years, but only posted a couple times... mods, please move if appropriate.
As far as the topic goes, I'm trying to find a vehicle for getting exposure to shorting sovereign debt at the retail level. I know you can short powershare bond futures and buy levered short ETNs, but I'm really looking for something that makes sense for a longer term (5 or 10-years), ideally where you pay an annual premium and the price rises/falls on a frequent basis, as opposed to a binary in-the-money (100) or out-of-the-money (0) value at period end/contract termination.
I know a lot of institutional investors have recently moved away from CDS and instead shorted sovereign bonds since there is concern government regulators might intervene to prevent the expected mess that comes with a default-triggering event. Hopefully there is a product that looks and smells like CDS at the retail level, that is reasonably liquid and not binary...
Any thoughts? If something like this doesn't exist, what would be the best (and most cost efficient) way to get that type of long-term exposure?
You have bond futures, but they only have decent liquidity for the important ones (mainly UST, Gilt, Bund 2y 5y 10y) and the capital required is big (depends on the contract, but 100k euros is the ballpark) so not really a retail option.
You could try some etfs or futures on FI indices.
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