Overview

The classic short-stock hedge removes first-order equity exposure; it does not decide whether the desk should own credit, sell near-term volatility, cap a takeover jump, or trade one rung of the issuer's capital structure against another. the preceding material changes the package itself. It moves from listed-option overlays through credit stripping and Ascots to distressed, merger, reset, and convergence situations where calling every position “long volatility” would misstate the risk.

By the end of this note you should be able to:

• reshape a delta-neutral convertible hedge with calls and puts without confusing premium income for a free hedge;
• distinguish a CDS overlay, an asset swap, and an Ascot by the risk that is transferred and the risk that remains;
• book a busted or capital-structure position as a credit/event trade when omicron dominates vega;
• recognise when merger terms, reset mechanics, or same-issuer relative value invalidate a mechanical stock hedge.

1. Contents
2. The big picture