Convertible Arbitrage

Convertible arbitrage is a trading strategy that involves buying a convertible bond and simultaneously selling short the underlying stock to hedge the equity risk. The goal is to profit from the mispricing between the convertible bond and the stock, while also collecting the coupon income and benefiting from volatility.

The strategy relies on the fact that the bond provides a floor, while the option component offers upside potential. In the crypto space, this strategy is adapted by trading convertible tokens or debt-like instruments against the underlying protocol token.

Success in this strategy requires precise modeling of the embedded option and active management of the delta-neutral hedge to navigate the volatility of the digital asset markets.