URI 4%  5/15/15 can elect to specify a cash percentage, the amount of cash that we will deliver in lieu of all or the applicable portion of the daily share amount in respect of each trading day in the applicable observation period will equal 1) the cash percentage multiplied by 2) the daily share amount for such trading day (assuming we had not specified a cash percentage), multiplied by 3) the daily VWAP for such trading day. The number of shares deliverable in respect of each trading day in the applicable observation period in our common stock (plus cash in lieu of fractional shares).

The chain of command is as follows:

1)      Company notifies the Trustee.

2)      Trustee notifies the DTC

3)      DTC notifies the Prime broker.

When you convert make sure you get the exact cash percentage and dates of observation period, otherwise you may be taking more risk than you want to.

This effective takes away about 2 months of optionality because the number of shares you get will start to get fixed as you pass the observation period. For example if EXH drops 20% on the 20^th day into the observation period, and EXH has elected to cash settle, the number of shares they will give you has already started to be determined. You would already have to had begun your stock buy backs in an arb position.

Many converts that mature have averaging periods that start before the maturity date if you convert whereas converts with put/call dates have averaging periods that start after you convert.

It is preferable to have the averaging period start after the maturity or put date. The shorter the averaging period the better.

One exception is that if the convert trades close to par, you could still have some optionality through the averaging period as you do not have to make the option to convert until right before maturity. There is a look back.

You will see some converts trade below parity as you go through the averaging period if the stock runs such as NTAP prior to maturity since your averaging period parity is lower.

SFD reports this morning. Bonds rallied both Monday and yesterday into this morning’s earnings – something we have not seen yet in 2013! I see two schools of thought for this bond going forward:

1)      The listed market is very high. The implied move for today is over 10%. Further, April 22/23 strike calls are still around 46 (mid market  49). The stock is trading right on strike and gamma is massive.

2)      There is a 40 day averaging period at maturity for this bond and holders lose some potential volatility surrounding the next earnings (6/8/13) as it is during the averaging period.

Given my inputs, I see bonds as fair.

SDF bonds mature 6/30/13.

NTAP 1.75%: decent buy vs the listed options vs. 36.50: 16.15-116.35

On my offer its 30.5% vol (even taking into account the 20d vwap averaging). I am selling Jun 31 strike for 36% vol and 32 strikes for 34.7% vol as a hedge. At 1.75 points of premium and 4vols lower implied than listed, the NTAP converts are attractive cheap put to have despite the disappointing non-event last earnings. Next earnings will fall during the averaging so should get some benefit from that also (so converts shouldn’t be as high as Jun expiry but still relatively cheap – even if one compares to May expiry which completely misses the earnings.

2/21/13

NTAP listed vols were 0.9% and 0.6% in the May and June expiries yesterday but did not see the follow through in the converts. The converts imply 31% on the offer incorporating the 20d vwap averaging (vs listed of 34-34.5 for that strike)

NTAP 1.75% v 35.51: 113.6-113.85

AXE 1% note on conversion/maturity – bonds are net share settled with a 20-day VWAP averaging perid starting BEFORE maturity 1/18/13-2/15/13. You will get the last coupon if you convert between the final record and pay dates. Bonds still model cheap but losing the 20 days prior to maturity for conversion period is worth 35c in the bonds and 1 vol point (30 vol to 31 implied vol). 30 day vol is 37 and 100d is 34 though and will report  2 more times prior to maturity, once during averaging period. Stock moves up 13% you own at parity or down 18% you own at par, gamma more than 3x average.

AXE 1% v 60.88 113.5-114

You should be short stock equal to 1/20 of the total dollar amount each day, so your pnl is pretty much locked in. For outrights, you want the stock to continue to move higher as the stock you receive will be worth more.

In the case of C mandys with a flat zone of 31.43 (3.1813) to 39.29 (2.5451)  (stock at 36), going into the averaging period, you can’t be to heavy or too light because if you are too heavy and stock runs up, your stock will move up very fast but your convert will not move up as fast as the stock during the averaging period. The stock at the end of the averaging period could be 39 but the stock could be 43. Same thing to the downside.

Average : 35.8113

Per: 2.7924

Value: 104.7991 (vs the close of $37.53) – the run up during the averaging period helped parity.