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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Dr. Porkchop's picture

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

Racer's picture

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

Dr. Porkchop's picture

How about an Extinction Level Event Binary?

johnQpublic's picture

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

Cpl Hicks's picture

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

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?

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.


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!!!


unwashedmass's picture


what? no BAC? too close to the bone?

fx's picture

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

Jack's picture

The market only goes up.  What good are these?

AUD's picture

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

Jean Valjean's picture

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

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.

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!!!

Devout Republican's picture

Oh I thought it was more like a put. Thanks

Michael's picture

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

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.

Michael's picture

Thanks LynnyB.

I like your Avatar.

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.


Seasmoke's picture

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

Ludwig Van's picture


Wonder what the insider-buying reporting requirements will be?


Ragnarok's picture

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

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.

Sokhmate's picture

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

longjohnshorts's picture

"Voluptuous," not "voluminous."

But, hey, everyone to their taste.

Sokhmate's picture

I meant voluminous. I like volume.

Seer's picture

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

A_MacLaren's picture

There can never be enough gaming tables, can there?

Scottj88's picture

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

That and silver will be all the rage...


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

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!

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?

Convolved Man's picture

Off track betting where you win when your horse loses?

Seasmoke's picture

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

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 :(

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.

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.

AccreditedEYE's picture

I've been waiting years for these.

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

Gold 36000's picture

finally a voice of reason.


Gold 36000

ReallySparky's picture

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

DosZap's picture

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

Their ALL on ACID I am telling ya!.

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!

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?

ZeroPower's picture

Bets on which CEBO will 'win' first?

MBIA anyone?

Loco Vida's picture

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

Ragnarok's picture

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

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.