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Prepare For A Trading Revolution: Here Come CDS For Retail Investors

Tyler Durden's picture




 

Ever felt excluded from the list of people who can (allegedly) buy insurance on their neighbor's house, and then burn it down? That's all about to change. The CBOE has announced that that on Tuesday, March 8, the Exchange will begin trading newly-designed Credit Event Binary Options (CEBOs) contracts. In essence these will be like Credit Default Swaps, accessible to everyone, which will have a $1000 payoff per contract in the event of a bankruptcy before contract expiration. Since the contracts will have specific prices, they will in essence replicate the LIBOR spread on CDS (or the inverse cash bond pricing from par), and the closer a company is seen as being to bankruptcy, the higher the contract price. What this will do is to revolutionize the shorting aspect of trading, as there will be no borrowing need to express a bearish outlook on a company, and no possibility for State Street, BoNY or your favorite repo desk to pull your borrow from underneath your feet thus forcing a short squeeze. In essence, this will be a marginable equity product trading as a credit derivative. We are delighted that finally one will be able to express a bearish opinion without fears of gross market manipulation and melt up, as the CEBOs will have little or no structural relationship to what happens with the broader stock market.

From the Press Release:

Credit Event Binary Options contracts allow investors to express an opinion on whether a company will experience a "credit event" (bankruptcy).   Due to inverse correlations between credit and equity markets, CEBO® contracts can be used as a hedging tool for individual stocks. The contracts also provide the advantages of price transparency available through a regulated exchange, currently unavailable in over-the-counter credit default swaps markets.

A CEBO contract has just two possible outcomes - a payout of a fixed amount if a credit event occurs or nothing if a credit event does not occur.

The CBOE, which first began trading single-name and basket Credit Event Binary Options in 2007, recently received SEC approval to amend the Credit Event Binary Options rules.

One change simplifies the terms of a payout for CEBO contracts, allowing CBOE to list CEBO contracts that specify bankruptcy as the only trigger for a payout.

The size of the CEBO contract payout if a credit event occurs has also been revised. If a bankruptcy occurs prior to expiration of the contract, the amount of the payout will be $1,000 per contract.

The ten companies that will first see bankruptcy contracts traded are the following:

  • AK Steel Holding Corporation
  • Advanced Micro Devices, Inc.
  • Arvinmeritor, Inc.
  • American Axle & Manufacturing Holdings, Inc.
  • Hovnanian Enterprises, Inc.
  • Huntsman Corporation
  • MBIA Inc.
  • The PMI Group, Inc.
  • Smithfield Foods, Inc.
  • Tenet Healthcare Corporation

One thing that is certain: this development will throw a wrench in long-established equity-credit cap arb models, as the sudden opening of the market to retail bets on corporate bankruptcy will have huge bilateral repercussions on every single asset class. It also means that every single quant model and factor driven investing system will have to be massive recalibrated. It also means that equities will no longer be a direct representation of corporate health, and equity and credit disconnects, long discussed on Zero Hedge over the past 2 years will suddenly be made glaringly obvious to everyone with just an equity account.

Oh, and by the way, if you thought institutional-only CDS trading ended in tears, just wait until every housewife in the world can bet on the solvency of the individual components of the S&P... We, for one, can't wait.

 

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Wed, 02/23/2011 - 18:43 | 990646 Dr. Porkchop
Dr. Porkchop's picture

Can I take one out on America? Since it's already broke, it should be a sure winner.

Wed, 02/23/2011 - 18:44 | 990653 Racer
Racer's picture

You beat me to it.. that is exactly what I want

Wed, 02/23/2011 - 18:52 | 990690 Dr. Porkchop
Dr. Porkchop's picture

How about an Extinction Level Event Binary?

Wed, 02/23/2011 - 19:05 | 990739 johnQpublic
johnQpublic's picture

i'd take one side of that...doesnt matter which one i suppose

Wed, 02/23/2011 - 21:36 | 991125 Cpl Hicks
Cpl Hicks's picture

Funny+...and I'll take the other side.

Wed, 02/23/2011 - 19:19 | 990763 ZerOhead
ZerOhead's picture

Great... just great.

More financial 'hit contracts'... well at least they sound affordable... but I'm still worried about what a disgruntled employee at Smithfield Foods might do to Smithfield's food in order to cash in.

Am I missing something here? Or am I just a moron like all my ex-girlfriends have already told me?

Wed, 02/23/2011 - 19:37 | 990832 NotApplicable
NotApplicable's picture

Missing something? Naw, you just found the trip-wire and how it's connected to the bomb, that's all. 

So now when the SHTF, they will blame it all on those evil speculators that are constantly attacking the markets, and not the Benron cartel.

Brilliant!

Thu, 02/24/2011 - 09:16 | 992367 Real Estate Geek
Real Estate Geek's picture

. . . well at least they sound affordable . . .

That's cause they're marginable!  I kinda like the sound of that--it means that we can win BIG!!!

/s

Wed, 02/23/2011 - 19:01 | 990726 unwashedmass
unwashedmass's picture

 

what? no BAC? too close to the bone?

Thu, 02/24/2011 - 07:14 | 992207 fx
fx's picture

I wonder what you will be able to buy from the $$ that will be paid out to you...

Wed, 02/23/2011 - 18:43 | 990649 Jack
Jack's picture

The market only goes up.  What good are these?

Wed, 02/23/2011 - 19:11 | 990767 AUD
AUD's picture

Another scheme to keep the punters in paper rather than commodities of real utility?

Wed, 02/23/2011 - 19:15 | 990775 Jack
Jack's picture

Good point.

Wed, 02/23/2011 - 19:16 | 990777 Jean Valjean
Jean Valjean's picture

Sell them!  In fact, sell $1,000,000,000 of them!  You can be just like AIG.

Wed, 02/23/2011 - 19:23 | 990795 Devout Republican
Devout Republican's picture

Can one, in fact sell these short?  hmmmm

The company would actually have to go bankrupt?

Put me on the ask for a brazillion Intel CDS's.

Wed, 02/23/2011 - 19:51 | 990870 Zeilschip
Zeilschip's picture

You can sell Intel CEBO if you think they'll never go bankrupt. However the price of the CEBO will go up if Intel's perceived creditworthiness worsens (and vice versa), i.e. your mark-to-market on your Intel positions becomes negative (positive). I've been waiting for ages for retail CDS/CEBO!!!

Wed, 02/23/2011 - 20:03 | 990896 Devout Republican
Devout Republican's picture

Oh I thought it was more like a put. Thanks

Wed, 02/23/2011 - 18:44 | 990658 Michael
Michael's picture

Harvard whiz kids still at it. When will we rid ourselves of the parasites?

Wed, 02/23/2011 - 20:15 | 990917 lynnybee
lynnybee's picture

Michael, your coments are always spot on. you're the man (or woman?) . Harvard wil also turn to ruin, give it another 20 years....this paper - scheme life is going away. Like Jim Rogers says, the farmer in Iowa will be driving the expensive sportscar in the future, not the criminal skull&bones group.

Wed, 02/23/2011 - 20:54 | 991007 Michael
Michael's picture

Thanks LynnyB.

I like your Avatar.

Wed, 02/23/2011 - 20:41 | 990971 unununium
unununium's picture
  • AK Steel Holding Corporation
  • Advanced Micro Devices, Inc.

...

On the bright side, it's nice to have a list of the biggest CDS positions that the pig men need to offload.

 

Wed, 02/23/2011 - 18:47 | 990667 Seasmoke
Seasmoke's picture

inside info for all my cousins here at ZERO HEDGE , bet AGAINST ME !

Wed, 02/23/2011 - 20:28 | 990943 Ludwig Van
Ludwig Van's picture

 

Wonder what the insider-buying reporting requirements will be?

 

Wed, 02/23/2011 - 18:47 | 990669 Ragnarok
Ragnarok's picture

It's like they opened a new wing in the casino.

Wed, 02/23/2011 - 18:49 | 990680 Rogerwilco
Rogerwilco's picture

Yeah, a new room, and if you look at the back of your jacket in the mirror, there's an "x" in chalk.

Wed, 02/23/2011 - 19:35 | 990830 Sokhmate
Sokhmate's picture

if this new room doesn't offer free lap dances by voluminous Ukrainian nurses, I'm not participating.

Wed, 02/23/2011 - 20:21 | 990925 longjohnshorts
longjohnshorts's picture

"Voluptuous," not "voluminous."

But, hey, everyone to their taste.

Wed, 02/23/2011 - 20:34 | 990962 Sokhmate
Sokhmate's picture

I meant voluminous. I like volume.

Wed, 02/23/2011 - 21:06 | 991039 Seer
Seer's picture

Placed correctly, "voluminous" = "voluptuous" :-)

Wed, 02/23/2011 - 19:44 | 990855 A_MacLaren
A_MacLaren's picture

There can never be enough gaming tables, can there?

Wed, 02/23/2011 - 18:47 | 990671 Scottj88
Scottj88's picture

Holy crap, you have to be kidding me...

That and silver will be all the rage...

http://thehardrightedge.com/troubledwater/

..

What kind of sick world do we live in with all of this nonsense derivative stuff...

Wed, 02/23/2011 - 18:48 | 990674 Gold 36000
Gold 36000's picture

a very poor hedging tool.  I've easily lost 50 percent on a stock and it stayed in business.

CEBOS for the masses!

Wed, 02/23/2011 - 18:49 | 990675 apberusdisvet
apberusdisvet's picture

Can I take one out on my neighbor who has 2 helocs, 2 kids in college and a wife who "saves" money by hitting the sales at Gucci and Tiffanys?

Wed, 02/23/2011 - 18:48 | 990676 Convolved Man
Convolved Man's picture

Off track betting where you win when your horse loses?

Wed, 02/23/2011 - 18:56 | 990703 Seasmoke
Seasmoke's picture

they already have that....its call a betting exchange !

Wed, 02/23/2011 - 18:48 | 990678 tmosley
tmosley's picture

How do I bet against the company issuing this crap?

Pretty sure bankrupted insurance agencies don't pay on their policies.

This development will revolutionize the market right into the garbage can (where it belongs), but I'm not sure that I would bet on getting paid in the long run.  Risk is all centralized, such that bankruptcy is all or nothing.  Either no companies fail, or the government AND ALL of the companies fail.

I just made myself sad :(

Wed, 02/23/2011 - 20:50 | 990998 Sheba Poe
Sheba Poe's picture

You may have asked a rhetorical question, but I'll answer nonetheless. Insurance "agencies" strictly speaking don't pay claims. They sell insurance on behalf of an insurance company, which bears the risk in exchange for premium. The agency is often the liaison between the insurance company and the policyholder. There are agencies called MGAs which may do some claims administration and in rare cases bear a portion of the insured risk, but this, I've surmised, is beyond the scope of your post. In order to bear risk, insurance companies must contribute to a state guaranty fund, which pays claims in the event of carrier insolvency. So, the answer you (don't?) want to the question you didn't ask is: "we do". Finally, the comparison between CDS and insurance is misguided and should be discontinued here at ZH.

Wed, 02/23/2011 - 18:49 | 990679 Cyan Lite
Cyan Lite's picture

I've been waiting years for these.  As a retail investor who invests directly into corporate bonds, this now provides me a way to hedge my bond portfolio.  I could also theoretically get long by selling CEBOs and collect premium upfront.  I would sell tons of CEBO contracts on any of the TBTF banks.

Wed, 02/23/2011 - 19:11 | 990764 AccreditedEYE
AccreditedEYE's picture

I've been waiting years for these.

+1M Me too. It's about damn time!

Wed, 02/23/2011 - 19:35 | 990828 Gold 36000
Gold 36000's picture

finally a voice of reason.

 

Gold 36000

Wed, 02/23/2011 - 18:49 | 990681 ReallySparky
ReallySparky's picture

What will they think of next? Unbelievable. Tyler do you ever bang your head on the desk?

Wed, 02/23/2011 - 20:36 | 990966 DosZap
DosZap's picture

If he does, he has company, this place is a friggin ZOO.

Their ALL on ACID I am telling ya!.

Thu, 02/24/2011 - 04:42 | 992128 StychoKiller
StychoKiller's picture

Things I experienced on Vitamin-A made some sort of sense in a holistic fashion, the market(s):  not so much lately!

Wed, 02/23/2011 - 18:49 | 990682 Financial_Guard...
Financial_Guardian_Angel's picture

Give me a thousand contracts on Illinois. Ok, I'll take an extra 1000 on the US Dollar. May I be allowed to purchase these using FRNs?

Perhaps a few extra on Gadhafi?

Wed, 02/23/2011 - 18:50 | 990683 ZeroPower
ZeroPower's picture

Bets on which CEBO will 'win' first?

MBIA anyone?

Wed, 02/23/2011 - 18:51 | 990685 Loco Vida
Loco Vida's picture

and what did Ted Kazinsky do wrong again????????

Wed, 02/23/2011 - 19:07 | 990748 johnQpublic
johnQpublic's picture

he got caught

Thu, 02/24/2011 - 04:43 | 992129 StychoKiller
StychoKiller's picture

He picked the wrong targets.

Wed, 02/23/2011 - 18:52 | 990686 Ragnarok
Ragnarok's picture

Wake me up when I get to create my own CDOs.....

Wed, 02/23/2011 - 18:52 | 990687 Gold 36000
Gold 36000's picture

YOu know what?  This is a scam!  The SEC invented this as  a way to smoke out small insider traders.  This is the SEC version of the bait car.

Wed, 02/23/2011 - 20:35 | 990964 unununium
unununium's picture

Keep dreaming.

Wed, 02/23/2011 - 18:52 | 990693 themosmitsos
themosmitsos's picture

Would've strongly prefered something other than just pass/fail though

Wed, 02/23/2011 - 18:54 | 990697 Marc45
Marc45's picture

The problem isn't CDOs or any of the derivatives.  The problem is when a huge investment bank overdoses on CDOs and the taxpayer is liable for the bailout.

How many here have lost money on "investments"? (I'm guessing everyone)

How many here have been generously helped out of that bind by Uncle Sam? (Hello?)

Wed, 02/23/2011 - 18:57 | 990699 random shots
random shots's picture

Just means they have found some new WMD with better spreads to pitch to insitutions and pension funds. CDO spread margins must no longer be what they use to be so they are now making it up on volume (read: more suckers).

 

PS: When have retail investors been right?

Wed, 02/23/2011 - 18:55 | 990701 philgramm
philgramm's picture

This has to be an Onion article............or a South Park episode.  WTF!!!!!

Wed, 02/23/2011 - 18:57 | 990706 Misean
Misean's picture

OOOOOOOOO....they should set up shop on street corner card tables...hmmm...no, the three card monty guys wouldn't want to be associated with such scumbag con-men.

Wed, 02/23/2011 - 18:58 | 990708 bogey4
bogey4's picture

If you're a corp. that is not a good list to be on.

Wed, 02/23/2011 - 18:58 | 990713 Jasper M
Jasper M's picture

And Who can credibly sell/back these instruments, in this environment?

(spooky voice) "Beeeewaaaaare Counterparty risk!"

I like the idea, but I suspect a lo of folks are going to get fleeced.  

Wed, 02/23/2011 - 18:59 | 990715 THE DORK OF CORK
THE DORK OF CORK's picture

This is beyond absurd - after all that has happened...........

Burning down the house

www.youtube.com/watch?v=xNnAvTTaJjM

 

 

Wed, 02/23/2011 - 20:50 | 990996 snowball777
snowball777's picture

+365 degrees

Wed, 02/23/2011 - 19:04 | 990718 Judge Judy Scheinlok
Judge Judy Scheinlok's picture

Yes! Finally! I was getting tired of buying preferred debt and shorting subordinate.

I'm going to take all of my royalties from syndication and point it toward Credit Event Binary Options contracts. I'm going to be bigger than Oprah!

Wed, 02/23/2011 - 19:19 | 990786 I Am The Unknow...
I Am The Unknown Comic's picture

friends and family of bankruptcy judges & attorneys should get filthy freaking rich off of this product! 

Find a bankruptcy judge and make them your new BFF

Wed, 02/23/2011 - 19:01 | 990719 drswhaley
drswhaley's picture

Figures the CBOE introduces CEBO - an anagram of their ticker symbol.  Will we be able to buy CEBOs on CBOE?

Wed, 02/23/2011 - 19:01 | 990721 A Man without Q...
A Man without Qualities's picture

Credit Event Binary Options contracts allow investors to express an opinion on whether a company will experience a "credit event" (bankruptcy)

So, it's a binary payout contract and the only trigger event is bankruptcy?  I wonder if this includes Chapter 11?  Frankly, this sounds rather messy...

Wed, 02/23/2011 - 19:05 | 990727 bob_dabolina
bob_dabolina's picture

I think they should make a legalized version of reverse Russian Roulette.

It works like this:

1. Retail investors are given a fully loaded revolver.

2. Retail investors get to "choose" who they want their counterparties to be but the only eligible counterparties are:

    -SEC

    -Their favriote Banker

    -Government official (as long as that official is in the underwriters voting district)

3. Let the trading begin.

We can call them 'Collaterized Voters Swaps' (CVS) The best part about this trading product is that it doesn't have to be on an exchange where burdensome regulations would hinder the free market from functioning smoothly.

Wed, 02/23/2011 - 19:03 | 990733 wawawiwaa
wawawiwaa's picture

I for one am all for it!!!. The scam that the banks have been allowed to mint money from for all these years is coming to an END.. BOND trading is now going to be available to everyone not just these scum bags!!!

Wed, 02/23/2011 - 19:03 | 990735 jkruffin
jkruffin's picture

So now Goldman and JPM have yet another tool to get rich from, while running other companies out of business on purpose (ie Lehman, Bear, etc....).

This entire market, our economy, and out currency are a complete joke. We didn't learn anything from MBS and CDO scams, so let's create a new one to fleece the sheep with right?

Good Lord.

Wed, 02/23/2011 - 19:07 | 990749 Dr. Porkchop
Dr. Porkchop's picture

Can you really blame Wall St. and the Bankers? Nobody goes to jail, so why wouldn't they just keep doing the same thing again and again? You can't complain about your four yr. old climbing up on the counter to get at the cookie jar if you never get the kid in trouble.

Wed, 02/23/2011 - 19:20 | 990785 chinaguy
chinaguy's picture

The TBTF - backed by the full faith of the US govt (and taxpayer) will pursue new riskier tools of mass financial destruction and fuck the serfs....again.

Wed, 02/23/2011 - 19:09 | 990757 walküre
walküre's picture

We're all going to be RICH! RICH!! I tell ya!

Just like the BIG BOYZ! I'm gonna sell all my gold and silver immediately to get me a few of those CDS GET RICH QUICK thingy majiggies!

Wed, 02/23/2011 - 19:31 | 990813 Dr. Porkchop
Dr. Porkchop's picture

Soon they will erect a banner at JPM:

Top dollar paid for your $crap gold and $ilver!! Get cash back today!

 

 

Wed, 02/23/2011 - 19:13 | 990768 The Alarmist
The Alarmist's picture

Ooh, ahh !!! This is going to be even better than selling derivatives to all those "sophisticated investor" county treasurers. 

This must surely be a sign of the coming apocolypse.

 

Wed, 02/23/2011 - 20:03 | 990894 A_MacLaren
A_MacLaren's picture

+12+21+2011

 

 

Wed, 02/23/2011 - 19:13 | 990769 Judge Judy Scheinlok
Judge Judy Scheinlok's picture

Would anyone like to join forces to develop an HFT algo for this?

Maybe a Facebook driven spooking campaign to push/pull spreads and a predator algo to capitalize?

Call (888) 800-JUDY. Our e-mail: judgemaster@hotmail.com

Wed, 02/23/2011 - 19:21 | 990792 Misean
Misean's picture

Can you eat these things? Just curious...

Wed, 02/23/2011 - 19:29 | 990804 Caviar Emptor
Caviar Emptor's picture

This is a big victory and a milestone in the history of gambling addiction. Give people a "Lottery Ticket" type of event and they're all over it, throwing money into the hope that, for once, their ship will finally come in and they can enjoy the ecstasy of "being right". A guaranteed winner (for the house, of course!). 

First known instance of CBOE: 30,000 BC, two Neanderthal descendants betting whether a volcano is about to erupt. 

Next known CBOE: two Roman legions betting if disemboweled guts of a goat would fly to the right

 

Wed, 02/23/2011 - 21:15 | 991063 Seer
Seer's picture

"Next known CBOE: two Roman legions betting if disemboweled guts of a goat would fly to the right"

Thanks for the chuckle! :-)

Wed, 02/23/2011 - 19:31 | 990815 gwar5
gwar5's picture

I only know that when the big boys make the "fancy" things available to the retail side it's because they're just trying to get paid for getting rid of it.

Wed, 02/23/2011 - 19:33 | 990825 Gold 36000
Gold 36000's picture

yeah.  Just buy gold and silver and be done with it.  It really is different this time.

 

Gold 36000

Wed, 02/23/2011 - 19:37 | 990837 jkruffin
jkruffin's picture

So how long until Goldman and JPM file the application to become a "retail investor" with the SEC?  They got bank status pretty quick right?

I already found the back door loophole to this scam too. If you work for any of the companies listed above, then ban together with your fellow workers and buy all the CEBO's you can get then run the business straight into bankruptcy.  A whole new way to work for your employer has been born.

Then again what happens when all those $1k payouts can't be made by AIG again? LOL

Wed, 02/23/2011 - 19:39 | 990842 Dr. Porkchop
Dr. Porkchop's picture

Turning water into wine. It's God's work, I tells ya.

Wed, 02/23/2011 - 19:45 | 990859 eatthebanksters
eatthebanksters's picture

Better than worthless stock options, eh?  Talk about incentive to do the wrong thing and built in conflicts of interest...Jeez, WTF?

Wed, 02/23/2011 - 19:43 | 990850 prophet
prophet's picture

"It also means that equities will no longer be a direct representation of corporate health..."

 

Well now that that is official, we can get on with it.

 

Wed, 02/23/2011 - 19:43 | 990852 eatthebanksters
eatthebanksters's picture

So you bet a small amount with the hopes of earning a big amount...along with every other 'housewife' on the planet.  When the event happens and the number of claims are too large to be paid out (just like the derivatives game), then what happens?  I see this as another fee producer for Wall Street with the potential for catastrophic results.  It may be legal, but it doesn't take an idiot to see this for what it is:  a bookmaking operation, the bookie lays off bets and takes the vig.  The bookie doesn't give a shit about the quality of the bets because he knows one side wins and one side loses but he still  gets his.  There was a great ZH article a couple of days ago which focused on ethics and morality vs. legality.  I wonder, if they make it legal to kill Wall Street Banker types how people would feel about the ethical and moral consequences of those actions? 

Wed, 02/23/2011 - 19:49 | 990868 g3h
g3h's picture

A binary option is a chip for the gamblers.  A sure win for the house.

Wed, 02/23/2011 - 20:06 | 990903 A_MacLaren
A_MacLaren's picture

A fool and his money are easily parted.

Wed, 02/23/2011 - 19:50 | 990869 Common_Cents22
Common_Cents22's picture

I'll start a service to show which executives buy these on their own companies ;)

 

Or how about selling the crap out of the CEBO's retail and reinsure your portfolio wholesale, or just buy PM's and disappear before settlement day!

Wed, 02/23/2011 - 19:51 | 990872 mynhair
mynhair's picture

No way.

No NFLX?  It's a scam.  Show yerself, Hamy.

Wed, 02/23/2011 - 19:55 | 990878 dark pools of soros
dark pools of soros's picture

HOV has to be one of the favorites to flounder

Wed, 02/23/2011 - 19:58 | 990885 Monkey Craig
Monkey Craig's picture

Thanks for posting this. Any ideas if one could generate income from selling these and payout the $1000 if it goes belly up?

Wed, 02/23/2011 - 20:04 | 990897 Greater Fool
Greater Fool's picture

I'd be very careful with these. AIG, just to take one example, never declared bankruptcy....

Wed, 02/23/2011 - 20:05 | 990899 Josh Randall
Josh Randall's picture

Fixing the corrupt system FAIL -- was this how the Germans decided to make a splash when they took over the system ? Nice...

Wed, 02/23/2011 - 20:26 | 990939 The Count
The Count's picture

I'll take two of them new fangled Erection Disfunction Default Obligation or whatever its called. No boner - they pony up! Yeeehaaaaa.

Wed, 02/23/2011 - 20:46 | 990989 snowball777
snowball777's picture

Flayed Shorts - (when naked shorts just aren't enough)

Wed, 02/23/2011 - 20:58 | 991017 Crispy
Crispy's picture

Dumbing down exotics into a binary is a sure way to seperate the retail masses from thier money. Worked like a charm so far, they got ZH talking about them.

By the time 99%of the people here think they have a handle on a concern going defunct the price wont warrant the risk.

The retail types that trade these will also think scratch off tickets and slot machines are a retirement strategy.

If this is innovation we are truly doomed.

Wed, 02/23/2011 - 21:02 | 991030 Catullus
Catullus's picture

This is fucking brilliant.  Now I can price counterparty risk

Wed, 02/23/2011 - 21:09 | 991043 FischerBlack
FischerBlack's picture

Huge money maker for the i-banks. 95% of the contracts will expire worthless 95% of the time. When they don't, the whole world is in flames, and the i-banks get bailed out anyway. Can't lose.

Wed, 02/23/2011 - 21:22 | 991085 lolmaster
lolmaster's picture

removes the need to short stock ... wtf? how do you think the MM hedges himself? (other than cross fingers and hope for TBTF ...) no one will trade these anyway. did CBOE pay you to write this crap?

Wed, 02/23/2011 - 21:49 | 991166 In Fed We Trust
In Fed We Trust's picture

Just in time for the fed to unload its ever expanding balanace sheet of the CDO's.

Then raise rates for 5-7 years and come around and buy up all the bankrupted CDO's.

Thu, 02/24/2011 - 00:22 | 991288 David449420
David449420's picture

I suspect that someone has their tongue firmly implanted in their cheek.  But then, over the last years I have heard about such incredible irrational behavior by the financial parasites that have brought the global community to where we are now, that this is just more of the same.

The thought continually occurs to me that if we simultaneously introduced EVERY Politician and Financial parasite in the world to a lamppost or tree, what a different and probably better world we and the global community would be looking at.

That of course, is just another pipe dream.

 

Wed, 02/23/2011 - 22:35 | 991349 FoieGras
FoieGras's picture

These will probably have zero volume aka ultra wide spreads or no quotes at all. Worthless.

Wed, 02/23/2011 - 22:55 | 991416 Buck Johnson
Buck Johnson's picture

But that doesn't mean that there won't be any shorting the old fashion way.  All this does is to allow the big dogs to naked short while the other people holding these instruments bet on said company will bankrupt or not bankrupt. 

Wed, 02/23/2011 - 22:56 | 991426 pdtrader
pdtrader's picture

I don't know whether to laugh or cry. 

Fuck it. I'm laughing.

Thu, 02/24/2011 - 00:09 | 991655 urrterrible
urrterrible's picture

Insurance bitchez!!!

Thu, 02/24/2011 - 00:09 | 991670 urrterrible
urrterrible's picture

So what happens if I buy one of these tasty morsels for 2013 expiration and the company is sold in 2012? Do you just lose your premium and contract is over?

Thu, 02/24/2011 - 00:28 | 991719 10kby2k
10kby2k's picture

This stinks of a loaded game

Thu, 02/24/2011 - 01:38 | 991924 Coldfire
Coldfire's picture

In 2007 Hong Kong distributors - like Citi - sold a bunch of retail CDS referenced to Lehman. When Lehman (was) croaked, their value went to zero. And tens of thousands of retail "investors" to whom the paper was targeted filed misselling complaints with the regulators. The distributors ended up being forced to buy back the worthless instruments at about 60 cents on the dollar. To this day Citi has protesters camped out at their Central branch, holding out for the remaining 40 cents. All this for 150 bps. Creating incentives to destroy companies should be against the law under the long-established insurable interest principle. But fools and brigands are running things now. Clearly.

Thu, 02/24/2011 - 02:17 | 992030 omi
omi's picture

So this sounds like a binary swaption. Not really a CDS product, most important aspect is that swaps are linear and options are convex. What's needed is just cash-settld CDS mini for retail, this will also have the effect of bringing in bid/ask spread on CDS on credits.

All of these just sound like you wanna be a seller of opts, just keep pumping 'em out.

Thu, 02/24/2011 - 05:00 | 992141 simonsito
simonsito's picture

something funny from the "CBOE Options Institute", I finally see how to loose both ways in the next flash-crash!" ;)

Example: XYZ stock is trading $100.
Outlook: You don't anticipate a significant move either up or down over the next 30 days and you expect a possible decrease in implied volatility.
Possible strategy: Sell the Strangle
[...]

At Expiration: 
Maximum Profit = Net Credit
Maximum Profit = $175
Upside Breakeven = Call Strike Price + Net Credit
Upside Breakeven = $111.75
Downside Breakeven = Put Strike Price - Net Credit
Downside Breakeven = $88.25
Maximum Loss = Unlimited

In Summary: The Short Strangle has limited profit potential but unlimited risk. Substantial losses are possible with a big move in XYZ stock over the 30 days or a major increase in volatility. Special approval from your broker may be required to sell naked options.

Do NOT follow this link or you will be banned from the site!