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A123 Systems: A Growth Story in the Making
Convertible arbitrage is a fairly common practice. If Goldman ended up owning a bunch of the converts, it wouldn’t be unusual for them to short the common to lay off their downside risk. That way if the common goes down they’ll make some money on the short sale. With the common falling, the convertible will probably move down as well, but it should drop less due to the stream of income and other provisions in the convertible. A losing position becomes a profitable one because they’ll make more on the short than they lose on the convertibles, plus they get the interest distributions on top of that. If the common goes up, then they have a natural stop-loss built in because they can cover the short with the convertibles. The math can get complicated, but with the right entry and exit points, it becomes an almost riskless trade. That’s sort of the whole idea behind arbitrage which literally means “riskless trade.”
I’ve seen several biotech start-ups get hammered by short pressure after they issued convertibles. (The impact of the convertible largely depends on the size of the offering.) Companies still issue them because they’re a cheap source of capital.
In the meantime, the main thing that is going to drive this stock is revenue. I bought some today at 4.70. I’m not sure that this has really found technical support, but it’s sort of a “death or glory” stock right now. I’m betting on Glory.
Jun 20, 2011. 07:09 PM
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