In a recent post I mentioned that I was buying reverse convertibles to capture yield. Of course the question of risk arose—What happens if the price of the stock falls below its buffer?
Unfortunately, it happened. In fact, it landed about 10% below the buffer price. One positive here is that the term of this particular issue has another four and a half months until maturity.
I am hopeful the price of the stock will finish above the starting price, in which case, the client will receive the full principle back at maturity. However, even if the stock’s price does not finish above its strike price, as long as it’s close, and since the client will receive shares of stock in lieu of principle, if the loss is small enough, it may be offset to some degree, or fully, due to the 18.65% rate of interest this particular issue is paying.
That said, for future investments in this type of vehicle, I came up with a a way to protect the client against this risk. If you are buying or considering investing in reverse convertibles, you’ll want to tune in. If you are not familiar with how these investments work, you should read my post from Feb. 11 on the subject.