Wednesday, February 23, 2011

CEBO Offered by CBOE - CDS for the Rest of Us!

Chicago Board of Options Exchange (CBOE) will introduce Credit Event Binary Options (CEBOs) so the retail investor can bet on the solvency of select companies.

As the name indicates, CEBO has only two outcomes: either the company goes bankrupt, or not. If the former happens, you will be rewarded with $1000 per contract. If not, you lose your money. A premium of 11 cents means 11% chance of bankruptcy sometime during the option's life. If a bankruptcy happens, a contract settles for $1. With a multiplier of 1000, the investor will receive $1000 per contract.

For basket CEBOs, the residual value is calculated at 40 cents, as opposed to zero in the case of single-name CEBOs.

Position limit is 5000 contracts for single name CEBOs, and 50000 contracts for basket CEBOs.

CEBOs were launched in 2007, but CBOE has simplified the terms of payout so that the only credit event that triggers a payout is bankruptcy.

Starting Tuesday March 8, 2011, the retail investor can buy CEBOs on the following 10 companies:

  • AK Steel Holding Corporation
  • Advanced Micro Devices, Inc.
  • Arvinmeritor, Inc.
  • American Axle & Manufacturing Holdings, Inc.
  • Hovnanian Enterprises, Inc.
  • Huntsman Corporation
  • MBIA Inc.
  • The PMI Group, Inc.
  • Smithfield Foods, Inc.
  • Tenet Healthcare Corporation

CEBOs for AK Steel and AMD will be available on March 8, and the rest will be available on March 9.

For more, go to the Zero Hedge article, or CBOE's press release. The CBOE's web site for CEBOs is here.

(I want a CEBO for the US government debt.)


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