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Subject:  Closed My Shorts Date:  7/26/2012  1:23 PM
Author:  trader2012 Number:  34267 of 37017

As I mentioned a couple weeks ago, I went long the debt and short the common of some junky issuers (ATPG, ERF, CLRO, CX, CZR, GNK, HOV, MXT, NWK, PCX, and XRM), thinking that what I’d lose on one leg could be made up on the other, but, meanwhile, I’d capture a fat coupon. That, anyway, was the underlying thesis. On paper, the idea seemed reasonable, and the positions were easy to put on. But I also have to admit that, a month later, I wasn’t paying proper attention to any of them. So I took myself flat yesterday, ending the project with a tiny profit of $745.

My take-away is this. If I’m buying bonds that are so worrisome that I have to create hedges for them, then I shouldn’t be buying them in the first place. This isn’t to say that any bond is risk-free. But if the opportunity doesn’t offer truly extraordinary rewards, then extraordinary efforts shouldn’t be made to, somehow, make the trade work. If the underlying issuer is clearly in trouble (as can be predicted from its financial statements), then the no-brainer trade is to avoid the debt and short the common, rather than mess with wishy-washy compromises.

Fish, or cut bait.
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