Trading Logistics - Can you trade bond/equity spreads

Boothorbust

mrb87I don't think you even know what you're asking. Trading "equity spreads"? And you don't trade "bond spreads", you trade bonds on spread, which wouldn't be logistically different than trading bonds, you'd just hedge yourself by selling treasuries short.

I think he's talking about capital structure arbitrage. Cases where, for some reason or another, debt and equity in a company trade at wide spread e.g., the bonds are trading as if default is imminent yet the equity is trading as if there is low probability of default. You can trade this by buying the bond and shorting the equity as eventually the spread must close. If the company defaults, you make money on your equity short (and default was already priced into your long bond position). If the company does not default, you make money on your long bond position, but lose some on you short equity.) Einhorn has been known to do this - see Fooling Some of the People All of the Time.

Thanks for the primer on capital structure arbitrage.

In any case he is using awkward terminology which means he probably wouldn't know what he's doing.