A busted convertible is often too low-delta for a useful stock hedge, yet too high-yielding to discard. Nick Calamos's synthetic-bond package turns that residual into an income profile: hold the busted convert, sell a call, and buy a farther out-of-the-money call to insure the acquisition jump. This note separates that credit/carry trade from a volatility hedge, then extends the same package logic to call-write/put combinations and mandatory preferreds.
Learning objectives. By the end of this note you should be able to:
- construct the synthetic-bond call spread and identify its unhedged credit, rate, and takeover exposures;
- explain why a call write plus put is a bounded-income package rather than a free collar;
- distinguish a mandatory preferred's changing gamma from a conventional convertible's gamma;
- decide when an option overlay reshapes risk better than changing the short-stock ratio.
In this lesson
- The busted-convert starting point
- The synthetic bond
- Call-write plus put packages
- Mandatory preferred overlays
- When overlays beat resizing the stock hedge
Before you start
The full lesson, with worked examples and exercise solutions, is for members.
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