Convertible bonds are sometimes priced inefficiently relative to the price of the underlying stock.
(Scenario 1)
(To take advantage of such price differentials, arbitrageurs ( marrill lynch and Jardyn) will use a convertible bond arbitrage strategy. If the convertible bond is cheap or undervalued relative to the underlying stock, the arbitrageur will take a long position in the convertible bond and a simultaneous short position in the stock. )
In the event that the price of the stock falls in value, the arbitrageur will profit from its short position. bond yield. Since the short stock position neutralizes the potential d ownside price move in the convertible bond, the arbitrageur captures the convertible .
On the other hand, if stock prices rise instead, the bonds can be converted into stock which will be sold at the market value, resulting in a profit from the long position and ideally, compensating for any losses on its short position. Thus, the arbitrageur can make a relatively low-risk profit whether the underlying share price rises or falls without speculating as to which direction the underlying share price will move.
(Scenario 2)
Conversely,(if the convertible bond is overpriced relative to the underlying stock, the arbitrageur will take a short position in the convertible bond and a simultaneous long position in the underlying stock. If share prices increase, the gains from the long position should exceed the loss from the short position. If stock prices decrease instead, the loss from the long position in the equity should be less than the gain from the price of the convertible bond)
@james And
@AJ7I don’t think the shorting by LJM (Merrill Lynch and Jardyn) has anything to do with what we are thinking which is to keep the price suppressed at $9.18. They have more to gain from the price going higher than the price going lower. The reasons the price rejected $9 ceiling twice were the other shorters who were always on our register and they using the whole situation to their advantage. Delta placement is very common with convertible notes. This helps them with market neutral position and helps with minimising their risk. Simple as that. They shorted at $9.18 to leverage their risk. Its a very simple equation.
( Share price goes up= convertible bonds are worth more now as they are closer or above the convertible price = they make money)
( Share price goes down= shorts at $9.18 is in the money but the convertibles are worth less as they are not in the money = offsets their investment risk as they still make money at maturity of the bonds plus the money from the shorts)
So I agree with
@james. They have nothing to gain from suppressing the sp when it gets closer to $9. They are neutral both ways.
(20min delay)