SUNDAY, DECEMBER 21, 2008 - VOL. CCLII NO. 140

Archive for the ‘Ivan Boesky’ Category

Highlights From Security Analysis Sixth Edition: Seth Klarman & David Abrams

In Arbitrage, Benjamin Graham, Carl Icahn, Ivan Boesky, Net Current Asset Value, Security Analysis, Seth Klarman, Warren Buffett on September 18, 2008 at 10:19 pm

The sixth edition of Security Analysis is a strange amalgamation of Graham’s original work (styled in British English) and new commentary from prominent value-oriented investors (in American English). I find it impossible to read fluidly. Nonetheless the contributors make a strong independent showing, especially Seth Klarman and his protégé, David Abrams. They argue—as I have done in numerous essays—that market inefficiencies are smaller in magnitude and frequency than before.

I am especially pleased that both men acknowledge the hedging opportunities present in derivative securities. This has become my favorite area of study and action—and one that appears unlikely to be outmoded soon. (Elsewhere, I have found much of the “value investing” philosophy to be comparatively inadequate.)

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AIG Options: Conversion Arbitrage Opportunity

In Arbitrage, Ivan Boesky on September 15, 2008 at 12:26 pm

Throughout the day, there have been multiple opportunities to create cheap synthetic positions in AIG options. The premium received in selling calls and puts is substantial, and in effect guarantees a satisfactory result regardless of whether the common stock advances, declines, or stands still.

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Lehman Brothers Common (LEH), $5 Calls (LYHDA) & $2.50 Puts (LYHPZ): Conversion Arbitrage Opportunity

In Arbitrage, Ivan Boesky on September 10, 2008 at 11:33 pm

Yesterday I noted these quotes for LEH, LYHDA and LYHPZ, respectively: $8.00, $6.10 (bid) and $0.69 (ask). For about 10 minutes it was possible to create a cheap synthetic position by buying the common in round lots and then selling calls and buying puts in corresponding amounts.

A decline in LEH to $1.90 will be fully offset by premium received from the short calls; any further decline will be offset by the puts. In a worst case scenario the investor will lose $9 per round lot, but his maximum gain is vastly disproportionate—$241. The mathematical expectation appears to be positive.

This type of conversion arbitrage is commonly practiced by market makers. It is not necessarily a violation of EMH since transaction costs tend to hinder everyone else.

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