This page has been archived and commenting is disabled.
Pair Trade Idea Of The Day: Short PHK (Good Luck Finding Borrow), Long JNK
If you have always been waiting for a relatively risk-free pair trade, which also has the added bonus of allowing you to put your money against Bill Gross, today's pair trade idea of the day, courtesy of Damien Cleusix is just for you, although as A.B. points out, good luck finding borrow: hopefully by now you have some incriminating pictures of your repo desk guy, which will force him to release a couple thousand shares your way.Of course, if Mr. Gross is long a sufficient amount of domestic insurance company debt (i.e. Fidelity which has no borrow whatsoever), doesn't matter how much clout you may have - it is 'the Gross' way or the Pacific Coast Highway.
Dear All,
We are back above 50% premium to NAV on PHK (PIMCO HIGH INCOME FUND).
We are recommending to short it and buy HYG and/or JNK to hedge (we would only hedge half of the short as we are negative on high yield bonds here).
There is >25% just waiting to be harvested here. The main difficulty will be to locate sufficient share to short.
Our last close-end fund arbitrage recommendation (PHYS vs GLD) made 15% in a matter of day. We are not expecting this now and it might take up to October for the trade to bear fruits.
Kind regards,
Damien
And here is A.B.'s not too PC contribution on the actual implementation of this trade:
can't short any of these HY ETFs, according to Fidelity..... what a fucking joke. Looks like Gross is VERY LONG the domestic insurance company debt (i.e. AIG). Not too much political clout there, is there?
»
- 5816 reads
- Printer-friendly version
- Send to friend
- advertisements -
Luck, bitchez
Thx for trade idea but what's the use of bringing it up when PHK cannot be borrowed! Think of another trade. This was definitely a sweet idea.
Trav7777,
Your "____, bitchez" comments are so fucking retarded. I've ignored it for 3-4 months now. Add some value or stfu.
Ha ha... brilliant. I went long PHK in Feb or March '09 when it traded at a discount. Sold a bit too early but what the hell, I made money. So why not take the other side now? If I can just find some to borrow...
Call COMEX...they lend shit they ain't got all the time
+10
I just called my desk, was able to get 5k shares with a 32 1/2% annualized vig. No kidding, fyi.
IB had shares available to short earlier today, but now it's "if shares can be located". Perhaps ZH readers borrowed 'em all!
now thats a what i like! a short fuck with a some long junk!
looks ripe for one of those 10-20%, 5 min plunges like in Apr & May;
ex is coming up next week i believe
Why would you buy something you are negative on, referring to his comment on high yield bonds?? Anyone?
You idiot, because you are betting on the premium gap closing. You may be a man, but you're not a smart one.
Wasn't talking about shorting PHK you phucking nitwit.
NoBull1994,
Zero Hedge is great because you have a lot of people with different backgrounds sharing and learning. There is always someone out there that knows more than you and me and there is also someone that knows less... this relationship is constantly moving. It will be better if instead of insulting him you take the time to explain to him... maybe he is smarter than you and me it's just that he is a new trader... at some point ALL of us were at that stage... do you remember???
[I am a man I am, check below for explanation]
By buying JNK, you'd be hedging against PHK's junk bond holdings, trying to make it into more of a bet just that PHK's premium to NAV will fall.
I may be dense (and probably am), but it seems to me when buying JNK you are hedging against your short PHK position. I still don't understand why you would buy JNK if you think it is going down. I understand buying cheap insurance to hedge in the form of options or CDS, but don't understand putting 50% of a trade down on something you thing is going south.
Many thanks.
I am a Man I am...
You are not dense, probably you are inexperience, that it's different. Let me explain...
This is a pair trade. This means that you are dealing with two securities that belong to the same sector (high yielding bond fund and ETF in this case...) and have a good degree of correlation in their movements. (this means that both of them follow each other moves most of the time).
If you see the chart...
http://img534.imageshack.us/img534/7105/chart2a.jpg
PHK is "overvalued" relative to JNK, based on the historic correlation that they have the past couple of months (check the chart at the upper left corner... you can see how the green line comes back to the pink one...)....here comes the trade:
You are going to bet that they are going to meet... you short PHK because you want to bet that the green line is going to go down in order to meet with the pink line at some point and also you bet that JNK (pink) is going to go up (because it needs to meet with PHK).
How do you know that they are going to meet? We can't guarantee that, this is our bet... but based on the relationship that they have in the past couple of months this seems to be the case (check upper left corner of chart)
Your question, why you would buy JNK if you think it is going down? This is a logical argument... if you are shorting PHK betting that is going to go down... then why are you going to bet that JNK is going to go up when it should go down too with PHK... the answer:
THE CORRELATION... in reality you don't know if PHK is going to go up or down (the same goes for JNK) but the only thing that you know is that they are correlated (THE NEED TO MEET) so by buying JNK you are betting that the meeting is going to happen the only thing that no one knows is how or when.
ASSUMING THAT THEY ARE GOING TO MEET YOU CAN HAVE THIS SCENARIOS
PHK goes up.... JNK goes up and they meet: YOU MAKE MONEY BECAUSE JNK compensates what you lose with your short PHK
PHK goes down... JNK goes up and they meet: MAKE MONEY IN BOTH
PHK goes down and JNK goes down and they meet: YOU MAKE MONEY BECUASE PHK compensates what you lose with your long JNK.
In simple terms: This trade is like a relationship you know that husband and wife live in the same house and every night they are together... but sometimes the husband is at the bar with his friends and the wife is at the gym... you know they are going to meet probably at home... probably at a restaurant... you don't know where but you bet that they are going to meet... unless they get divorced!(correlation is broken)
PA, awesome. Thank you very much for the detailed answer and for taking the time. Most appreciated. The linked chart clued me in right away.
My background is engineering and construction. No paired trading experience.
As usual, I learned something on ZH.
Once again, muchos gracias!!
yepp, can only agree, thanks for the explanation!
I may be dense (and probably am)...Well, you DO like AAPL at these levels broseph... LOL! Just kiddin'!
Damn, android is coming on pretty strong! ;-) but I'll stick to my guns
So what about the guys in May who were shorting at 70 PREM NAV and got their asses handed to them?
You mean May '09? Seems like they'd have been OK if they'd hedged against PHK's portfolio of junk bonds with a long position in JNK. Premium on PHK collapsed from 70%+ back to around 40%.
Interesting SP500 chart ...
http://stockmarket618.wordpress.com
You of course realize this is a monthly dividend payer, so as you sit waiting for you bet to play out, youll be paying out about a percent a month back to the lender. And its up 1/2 a percent today. By October 4th youll be down 2% regardless of the price to cover.
There are certainly a lot of details like that to take into consideration.I read and understand the entire article and I really enjoyed it to be honest.
cheap vps | windows vps | forex vps