Something wicked this way comes.
Traders, commence your evil finger pyramids. Retails CDS’s are coming.
I know there’s more than a few John Paulson wannabes here on WSO but, as small investors we never had the chance to bet like the big guys – playing around with exotic CDS’s and prospering from the horrendous failures of others.
Well friends, the CBOE has been listening to your prayers and are now set to make your epic short selling dreams come true:
“The Chicago Board Options Exchange (CBOE) announced today that on Tuesday, March 8, the Exchange will begin trading newly-designed Credit Event Binary Options (CEBOs) contracts.”
Yeah, Credit Default Swaps for the little guys.
Much like CDS’s, the CEBO’s are essentially modified cash settled binary call options that pay a fixed amount come a credit event (in this case bankruptcy) and also rise or fall in value dependent on the certainty or imminence of… a credit event.
Unfortunately only ten companies will be available to short, sabotage, and make ridiculous bank on come launch date:
• AK Steel Holding Corporation AKSC
• Advanced Micro Devices, Inc. AMDC
• Arvinmeritor, Inc. ARMD
• American Axle & Manufacturing Holdings, Inc. AXLC
• Hovnanian Enterprises, Inc. HOVC
• Huntsman Corporation HUNC
• MBIA Inc. MBID
• The PMI Group, Inc. PMID
• Smithfield Foods, Inc. SFDC
• Tenet Healthcare Corporation THCC
Now, Zero hedge bets this will change trading forever, from massive recalibration of quant models to some losses in prime brokerage.
Thing is though, as revolutionary as this is; whether you like it or not CDS’s played a significant factor in the meltdown and you need not look further than Lehman to see it.
What happens now when every Tom, Dick, and Harry can hold piles of worthless contracts?
And who’d you like to take a stab at this with?
Wish there was one for Illinois.
Yay
very nice. Thanks for the note
these will be perfect for the upcoming recession when oil gets to $175
hmmm I'm suspicious of the actual execution of this.
seems like another WS creation. Seth Klarmen's rant in Margin of Safety anyone?
BTW zero hedge is just a lot of outlier predictions. they are able to get away with shooting for the moon due to the A-Symmetric nature of "forecasting" a crash or boom.
interested to see how the markets for these things form. also curious as to the fees and commissions charged on these things. if it is anywhere near the costs of trading equity options then the retail investors wont stand a chance
This is exactly what is wrong with wall street.
This benefits the exchanges, traders, and banks at the expense of the retail guys. The banks make money selling the contracts, the exchanges take in fees from the increased volume, and the traders make money picking off the retail. If (when) an actual credit event occurs, who knows what the market will be like for them. There is a chance that retail could face a market dominated by the banks who wrote the securities in the first place.
There is no justifiable reason this market to exist other than to make wall-street money.
Retail investors can write these contracts too to collect premiums just like vanilla equity options
But yes the exchange made these for increased trading fees since spreads on everything else are tightening
I also think it is bullshit that they trade in 1% steps. But that also creates a good opportunity to basket them and try to capture the fact that something that should be priced at 2.5% can only trade for 2 or 3%
Yes retail can write the contracts, but I'm curious how that will work with CDSs.
They offer such a high payout on such an extreme event (default), that I could see a lot of leverage being allowed. I think a big balance sheet is your best risk reducer when writing these options and that favors the banks.
Woohoo! Breakout the white french cuffs and slick back your hair! Time to make some bank!!!!
the payout is just the inverse of the risk assumed. so on investment grade underlyings it will seem extremely levered due to cost/payout
Right, and my point is that you will need a big balance sheet to survive tail risk / black swans. If a shock hits a blue chipper, retail CDS writers will get raped on margin while banks have the balance sheet to ride out the storm (or at least work the position).
yeah selling a naked swap on lets say a AA bond is going to require a ton of margin for a small amount of premium. i am going to assume that most people will use these with equity options and stock to create new types of investments. for example buy a fairly out of the money put on the related equity using part of the premium collected as that protection
the idea behind these is to allow retail investors to more easily cross between different parts of the cap structures
I can see this being useful if people use them as covered puts (essentially), but if retail investors are allowed to sell these naked I see a good deal of concern.
Interesting. Let us see how it plays out. There is a suspect why only few firms though?
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