Tuesday, 14 July 2015

Bond puts and Bond calls

In a recent post, I speculated that there might be some differential meaning in the implied vol of puts versus calls embedded in corporate bonds.  I don't think so today.  I looked into it a bit more.  Some things I picked up.  The corporate treasurer is just as likely to consider a refinancing (exercise of his call) based on a significant improvement in the firm's credit rating as he is based on lower interest rates.  That is, the call implied volatility is telling us something about rate expectations together with credit spread changes.  

There are still a minority of corporate bonds even with a call, which is the older historically of the two kinds of embedded option you see in a corporate bond.  Puts are still a rarity with corporates.  It is also likely that the corporates market got the idea for calls form the convertible market, maybe also the holder put too.

Ceteris paribus, the presence of a put is an indication of the market having expected a higher probability of downward future pressure in the bond price during its life.  

Corporate puts and calls are usually both struck at par.  So I imagine if there's an incentive to sell when significantly above the calls price, and a tendency for the bond to become downside sticky around the put strike, I would imagine that this can take a lot of the volatility of the price action of the bond.