Foreign aid is taking money from the poor people of a rich country and giving it to the rich people of a poor country.
- Ron Paul
Let me guess- they’re going to charge Trump.
I’d change the word “intuition” to guiding principles and/or morals/ethics depending on the situation. I was late to BTC because it was “too complicated” and “I didn’t get it” based on my background guiding principles. Same guiding principles immediately latched on to Stay Humble, Stack Sats and avoided all shitcoins. Lending BTC seemed too complicated, and i didn’t “get” shitcoins.
Lose a few, win a few. Just fine tune your principles and listen to them.
Surfing done for the day. Now cafe and scone while I watch everyone else have a go.
No bad choices! Was on the north shore of Maui, so went with the Ahi caught in the water I was looking at.
If the menu has the name of the guy who caught the fish, get that.
Half the harm that is done in this world is due to people who want to feel important. They don’t mean to do harm; but the harm does not interest them. Or they do not see it, or they justify it because they are absorbed in the endless struggle to think well of themselves.
- T.S. Eliot
If I could pick only one thing to learn from nostr:npub1s05p3ha7en49dv8429tkk07nnfa9pcwczkf5x5qrdraqshxdje9sq6eyhe it would be this.
GN.
nostr:note1g58e522p64la7qdlzgmlhezlek5s626zzdu3v479z4c6dm8v8zzqvr5ak5
So Bitcoin negative for the unethical, positive for the ethical, and retard-neutral?
“Chance favors the prepared.” & “Opportunity is missed by most people because it is dressed in overalls and looks like hard work.”
GN
Great take from Matt Levine of Bloomberg on how $MSTR is playing convertible bond investors off of levered ETF investors…
MicroStrategy
Here’s the basic idea of convertible arbitrage. You buy a convertible bond that will pay you back, in a year, either (1) $1,000 in cash or (2) 20 shares of the company’s stock. (Or some other “conversion ratio”; 20 is an arbitrary simple number.) If the stock today is at, say, $2 per share, then those 20 shares of stock are worth $40, and you will almost definitely want the $1,000 in a year. If the stock today is at $200 per share, then those 20 shares of stock are worth $4,000, and you will almost definitely want the stock in a year. At very high stock prices, the convertible bond is essentially equivalent to stock; at very low stock prices, it is essentially equivalent to a $1,000 bond.
You, as a convertible arbitrageur, are in the business of hedging your stock-price risk. You do this by selling the stock short. How much you sell short depends on how much stock-price risk you have. If the stock price is very high, then the convertible bond is essentially stock, and a $1 move in the stock price should cause about a $20 move in the convertible price (because the convertible represents 20 shares). So you sell short 20 shares of stock to hedge your stock price risk. If the stock price is very low, then the convertible has essentially no exposure to the stock, and a $1 move in the stock price should cause about a $0 move in the convertible price. So you sell short zero shares of stock to hedge your (non-existent) stock price risk.1
And in between those extremes, the convertible has some medium amount of stock exposure. If the stock today is at $40 per share, then the convertible might have, say, a 70% exposure to the stock: A $1 move in the stock price should cause about a $14 move in the convertible price ($1 times 20 shares times 70%). So you’d sell short 14 shares of stock — 70% of the shares underlying the convertible — to hedge your stock price risk. The actual number — the “hedge ratio” or “delta” — varies smoothly between 0% and 100% and can be calculated by reasonably well-understood methods. The point is that eventually, at maturity, the convertible will be paid back in cash or stock, so eventually it will be pure cash or pure stock; before that, the convertible has some varying probability of being cash or stock.
What does it mean to hedge your stock-price risk? Well, literally, it means that if the stock moves up (or down) by $1, you will make (or lose) some money on your convertible bond, and you will lose (or make) some offsetting amount of money on your stock position.2 The stock can go up or down, and you don’t care; you’re hedged either way.
You can’t just set this and forget it, though. The higher the stock price is, the more stock-like the convertible is: If the stock price is high, the convertible is mostly stock, but if it is low, the convertible is mostly a regular bond. So your correct hedge ratio will change as the stock moves up or down. So if the stock goes up by $1, you will make some money on your convertible and lose some offsetting amount of money on your stock hedge, but then at the end of the day you will adjust your hedge by selling more stock, because the convertible now has more stock exposure. On the other hand, if the stock goes down by $1, the convertible will become less stock-like, so you will have to adjust your hedge by buying back some of the stock you were short.
This is the more practical meaning of hedging your stock-price risk. It means that every day the stock moves around and you rebalance your hedge. When the stock goes up, you sell some stock at high prices. When the stock goes down, you buy some stock at low prices. Hedging the convertible means buying stock low and selling it high.
The thing to realize is that, the more you get to do this, the more money you make. If the stock goes up one day and down the next, you sell stock on the up day and buy it back on the down day and make a profit. If the stock just stays flat or drifts up or down, you don’t make that much money adjusting your hedge; if the stock bounces around wildly, you do.
So a convertible bond is a bet on volatility: The more the company’s stock bounces around, the more money convertible arbitrageurs can make.
I used to be a convertible bond investment banker, and this was, often, roughly the pitch to companies: “You have a valuable asset that you don’t even know about: volatility. Your stock is volatile. You probably don’t think about that much, and if you do, you think it’s bad. You don’t like your volatile stock. But do you know who does? Convertible arbitrageurs. They will pay you a lot of money for that volatility, in the form of cheap convertible bond financing.”
You know who knows all about this? MicroStrategy. Bloomberg’s Yiqin Shen reports:
To sate his multibillion dollar rampant appetite for Bitcoin, Michael Saylor has tapped demand from retail investors transfixed by MicroStrategy Inc.’s more than 500% rally this year. He’s also benefited from hedge funds who care far less where the stock trades.
Calamos Advisors LLC co-Chief Investment Officer Eli Pars has been among the buyers for more than $6 billion of convertible notes sold by MicroStrategy this year to finance the purchase of his ever-expanding cryptocurrency hoard. Like many other managers, Pars uses the notes in market-neutral arbitrage bets that exploit the surging volatility of the underlying asset.
“Convertibles are a way for issuers to monetize the volatility of their stocks, and MicroStrategy is an extreme example,” said Pars, whose firm owns more than $130 million of MicroStrategy notes in both long and arbitrage strategies.
We have talked about MicroStrategy a lot, and I have said that it is roughly in the business of (1) owning a big pot of Bitcoins, (2) selling stock at a large premium to the value of its pot of Bitcoins and (3) reinvesting the money in more Bitcoins. This is a weird enough business model.
But to be fair MicroStrategy is also in the business of selling billions of dollars of convertible bonds to buy more Bitcoins, which is in many ways a much nicer trade:
Bitcoin is, at least historically, a volatile asset, and there is a lot of demand for options on Bitcoin. It has traditionally been hard for US institutional investors to buy lots of options on Bitcoin in a convenient way. MicroStrategy convertibles provide, in a very rough way, billions of dollars of Bitcoin volatility bets in a nice institutional-friendly package.
But MicroStrategy is not just a pot of Bitcoins: It also trades at a large premium to the value of its pot of Bitcoins. You could have various fundamental views on that premium — “it is too high” is a normal view, but “it is too low” also seems popular — but the point here is that there is no reason to think it is stable. There’s no reason to think “ah yes MicroStrategy should naturally trade at 2x the value of its Bitcoins forever,” or whatever. And so in fact MicroStrategy’s stock price is much more volatile than Bitcoin is, so MicroStrategy can sell its volatility at a huge (and deserved) premium to the volatility of Bitcoin.3
I have been talking about convertible bonds as mostly a stock volatility bet, but they are also a credit bet: For convertible arbitrage to work as I described, you need to be pretty confident that, if the stock price ends up low, the company will pay you back the $1,000. My gut sense is that the one-sentence intuitive credit analysis of MicroStrategy — “it has a huge pot of Bitcoins, has borrowed significantly less than the market value of that pot in the convertible market, and has like a $90 billion equity cushion” — is just fine for convertible investors in a way that it might not be for, like, ratings agencies or traditional credit investors.
There’s one other really neat aspect of the trade. We have also talked about another popular MicroStrategy derivative instrument, the levered exchange-traded funds that own billions of dollars of its stock. The rough way to think about those is:
1. They take in $100 of investor money and borrow $100 from banks to buy $200 of MicroStrategy stock.
2. If the stock goes up 5% one day, then they have $210 of MicroStrategy stock and $100 of borrowing, so there’s $110 of investor equity.
3. But they need to give investors 2x exposure every day, which means that they need to go out and borrow $10 more to buy more stock so they have $220 of stock.
4. On the other hand, if the stock instead goes down 5%, they have $190 of stock and $90 of equity, and need to sell $10 of stock to repay borrowing to maintain their 2x exposure.
That is: The ETFs are forced to buy high and sell low, the opposite of convertible investors.
Leveraged single-stock ETFs are, in an approximate sense, a bet against volatility: The more volatile the underlying stock is, the worse the leveraged ETF does at tracking its returns. (This is called “volatility drag.”) They are not sold as bets against volatility — they are sold as extra-volatile bets on the stock — but that is roughly what they are. And they are volatility-reinforcing: The more money there is in leveraged MicroStrategy ETFs, the more volatile MicroStrategy’s stock will be, because those ETFs have to buy more stock whenever it goes up and sell stock whenever it goes down. The more it bounces around, the more they bounce it around.
MicroStrategy’s convertibles are the opposite: They are a bet on MicroStrategy’s volatility, and they are volatility-dampening. Convertible arbitrageurs buy stock when it goes down and sell it when it goes up, which reduces the volatility of the stock.
Ordinarily this suggests some limit on a company’s ability to sell convertibles: Convertibles are worth more if your stock is more volatile, but the more convertibles you sell, the less volatile your stock will be, because convertible arbitrageurs will smooth out the moves in your stock by buying when it goes down and selling when it goes up. MicroStrategy has, weirdly, found a solution: It sells volatility to convertible arbitrageurs, and buys volatility from retail ETF investors, so there’s always plenty of volatility to go around. nostr:npub1k7vkcxp7qdkly7qzj3dcpw7u3v9lt9cmvcs6s6ln26wrxggh7p7su3c04l nostr:npub1s5yq6wadwrxde4lhfs56gn64hwzuhnfa6r9mj476r5s4hkunzgzqrs6q7z
https://www.bloomberg.com/opinion/articles/2024-12-05/microstrategy-has-volatility-to-sell
GM take 2
GM y’all.