Strategies · Core
Convertible Arbitrage
Long the convertible and short the delta in the stock — harvest cheap implied vol / credit, with funding and squeeze risk.
Definition
Buy the CB, short stock to the model delta, manage credit and volga. Returns come from cheap vol, carry, and sometimes a credit mis-price. 2008 was a forced unwind of the same crowded book.
Why it matters
It is how converts are ‘arb’ed. Prime, borrow, and issuance supply are the constraints.
Case
2008: stock shorts work, converts gap on credit, and primes pull financing. The hedge was not a hedge.
How to read it
Delta, credit overlay, and funding. A busted convert is a credit trade; a high-delta convert is a stock trade.
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