2011-03-29

CBOE Relaunched the Credit Event Binary Option (CEBO), aka the CDS for the Rest of Us

While searching for a nice way to short some of the markets I am following, I stumbled upon this press release from the CBOE about what they call CEBOs:
Credit Event Binary Options contracts allow investors to express an opinion on whether a company will experience a "credit event" (bankruptcy). Due to inverse correlations between credit and equity markets, CEBO® contracts can be used as a hedging tool for individual stocks. The contracts also provide the advantages of price transparency available through a regulated exchange, currently unavailable in over-the-counter credit default swaps markets.

A CEBO contract has just two possible outcomes - a payout of a fixed amount if a credit event occurs or nothing if a credit event does not occur.

The CBOE, which first began trading single-name and basket Credit Event Binary Options in 2007, recently received SEC approval to amend the Credit Event Binary Options rules.

One change simplifies the terms of a payout for CEBO contracts, allowing CBOE to list CEBO contracts that specify bankruptcy as the only trigger for a payout.

The size of the CEBO contract payout if a credit event occurs has also been revised. If a bankruptcy occurs prior to expiration of the contract, the amount of the payout will be $1,000 per contract.
These CBOEs are hence nothing but some a simplified and exchange traded version of the CDS. While they are presented as an equity hedging tool, they remain nothing less than a credit speculation one. Although the fact the only credit event accepted is the bankruptcy one, make their use quite tricker...

Here are some more details:
  • CEBOs translate CDS exposure into a transparent exchange traded marketplace.
  • CEBOs are binary options that pay fixed amounts upon a streamlined credit event, which may include bankruptcy only.
  • CEBOs are similar to fixed recovery CDS contracts but are exchange traded and can be purchased with an upfront premium that can be margined.
  • CEBO premiums reflect a company's discounted Probability-of-Default during the contract's life.
Unfortunately, it seems like only 10 of them are currently available — and not those I was after:

Ticker Reference Entity Reference Obligation
AKS AK STEEL CORPORATION AKS 7.625% 2020 Sr. Notes
AMD ADVANCED MICRO DEVICES, INC. 6.00% Convertible Senior Notes due 2015
ARM MERITOR,INC formerly ARVINMERITOR, INC. 4.00% CONVERTIBLE SENIOR NOTES DUE 2027
AXL AMERICAN AXLE & MANUFACTURING, INC. 9.25% Senior Secured Notes due 2017
HOV K. HOVNANIAN ENTERPRISES, INC 61/4% Senior Notes Due 2016
HUN HUNTSMAN INTERNATIONAL LLC 5 1/2 % Senior Notes due 2016
MBI MBIA INC. SENIOR INDENTURE (generic)
PMI The PMI Group, Inc Senior Debt Securities (generic)
SFD SMITHFIELD FOODS, INC., Senior Debt Securities (generic)
THC TENET HEALTHCARE CORPORATION 8 7/8% senior secured notes due 2019

4 comments:

Patricia Elliott said...

As of April 26 2011, the Chicago Board options Exchange (CBOE) declares that they will continue the roll-out of Credit Event Binary Options (CEBO). According to the news, after the re-launched there was a great demand from market on protection against the downside risk because of broker dealer default.

For me, the contract will be of great help for price transparency and centralized clearing shortened the timeframe over which evolution occurred. Moreover, CBOE added five new Credit Event Binary Options (CEBOs) with the addition on five new option based on financial firms including Bank of America Corporation., JPMorgan Chase & Co., Citigroup Inc., The Goldman Sachs Group, and Morgan Stanley.

Anonymous said...

nice

digital options said...

Good news for the world of traders.

Option Trading Strategies said...

Great news for the binary trading world, and it really has impacted it quite well seeing as we are now 1 year on form this news :D.