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Author: JustMee01 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35387  
Subject: Building an effective hedge Date: 3/25/2013 12:42 PM
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Are there any distressed bond investors out there in cyberspace that actively hedge their positions using equity put options?

I'm wondering about the best option. If you buy an in the money long dated put, the cost is high. However, an in the money put is essentially a synthetic short, and it should move pretty much lockstep with equity. Its gains should mirror equity's crash in the event of bankruptcy. The downside is that the hedge is so expensive that it eats up the bond's yield.

On the other hand, one year out of the money puts are cheaper. They're movements are less predictable, though. Is there a rule of thumb on constructing a hedge; is it better to look in the money or out of the money?

Peter
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