Limits to Arbitrgage: The Dual Chesapeake Preferreds, Part II
I did a post a few weeks ago about a market inefficiency that can't be directly arbitraged: the price discrepancy between the two Chesapeake Energy convertible preferreds. If you are curious, the company has a PDF on their website with more detailed information about the various preferreds.
The NYSE listed preferred CHK-D is trading at 95.73 today. Just to be at yield parity, and ignoring the fact that conversion parity favors CHKDG, the CHKDG should be trading at (5/4.5)*95.73 = $106.36.
So, that is 23% upside from the current level just to be at yield parity!
Also, the last time that the CHK-D traded at this level was on Nov 4. The CHKDG was trading above 90 at that point.
I own the CHKDG, as it is attractive on both a fundamentals basis and incredibly cheap compared to its more liquid counterpart.
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I own the CHK-D, as it is attractive on both a fundamentals basis and incredibly cheap compared to its more liquid counterpart.
Typo, or am I confused? CHKDG is the one trading at a discount.
That was a typo - I fixed it.
I'm late to this party, but that's probably good.
Is my (income-oriented) math right on this one. CHKDG trades at 65, which is conversion parity of 25.23. (65/2.5766). The Jan '13 25 call is trading at 0.83.
so I buy 100 CHKDG, sell 2.5 Jan calls. Stock goes past 25.23, I convert into 257.7 shares, 250 of which get called away from me at $25. I sell my remaining 7.7 shares at 25.23.
But I net $1.50 of option premium, (.83-.23 * 2.5), AND the interest payment of $2.50 for half a year.
so that's $4.00 on $65 for only 6 months, which is an 12.3% yield quasi-annualized.
If the preferred just sits there at 65 and I continue to write calls on the common, I get to keep the entire option premium, or 14.1%
Am I missing something?
Not missing anything, but I actually think those calls are underpriced so I would not sell them.
Yeah, this is for a parent's retirement account. Not so interested in capital gains and very conservative.
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