DB CoCos

[gadfly]

I'm no CoCo expert and I have no idea what is going to happen with DB, but would like to hear some thoughts on this:

 

The DB 6% perpetual CoCos are low 70s lately.

 

The Jan 2018 $3 puts for DB ADR are $.30

 

Seems like you could get close to a "free roll" on the CoCos with something like this:

 

buy 100k face value of CoCos for say $72,000. That will give you $7,500 income over 1.25 years if payments are not suspended (big assumption I suppose).

 

buy something like 2500 $3 DB Jan 2018 put contracts for about $7,500. Also, given the systemic risks with DB it might be cheaper to hedge with some other security that is likley to have a more convex payout if DB goes really bad.

 

In 1.25 years:

 

If things stay roughly the same you're probably even. Puts are worthless and CoCos are about the same price

 

If things recover you earn the return on the CoCos, which could go to high 80s quickly like they did a few months ago.

 

If things go terrible, say equity gets wiped out. You have $75,500 from the puts and I'd assume the CoCos will have some recovery value, lets say $15,000 for $90,000 total.

 

Anyway, just trying to learn more about these securities, if anyone has any insight, that'd be great.

 

Also, can you buy these bonds with Interactive Brokers?

 

Thanks