Discussion of New Perspectives on Forced Redemption Game Theory

No more nonsense, here are the initial thoughts:
Buy convertible bonds that are about to meet the mandatory redemption conditions and have stopped counting towards redemption, while also purchasing bonds with double lows in the same sector.
The core idea is to use hedging to profit from the rebound in premium rates of bonds nearing mandatory redemption.

Traditional approach and its flaws:
Convertible bonds that are about to be redeemed are essentially similar to short options, requiring the underlying stock to drop significantly or stay flat to eliminate redemption risk, then waiting for the premium rate to rebound to realize gains. A common hedging method is to hold a certain position in the underlying stock, but the premium rate rebound can also occur through rapid stock price declines, which risks a “double kill” of both stock and bond, leading to significant losses.

Why use double lows in the same sector to replace the underlying stock:
First, clarify that most convertible bonds are not driven by major players or company efforts to achieve redemption, but rather follow the sector’s momentum. Therefore, their redemption probability is highly tied to sector prosperity. When the sector is hot, bonds with low prices and high elasticity can serve as substitutes for stocks, ensuring upside gains while locking in downside losses, effectively reducing losses caused by sharp sector declines.

This idea just came to me today, partly inspired by my coincidental heavy holdings in Jingneng Convertible Bond and Haiyou New Material on Friday. From this perspective, I see this as a very typical case.

Practical example (hindsight):

Market opening on 3-20:
Jingneng Convertible Bond opened at 123.2, just one day away from temporarily escaping redemption risk (expected price to be 125-126). Jingke Energy surged 6% (close to redemption threshold), with the lowest price around 121;
Haiyou Convertible Bond opened at 105.6 (already announced redemption), with redemption price at 101.2 (considering option prices, actual bottom should be around 103), with upward movement generally tied to Haiyou New Material.

The above is a simple analysis of Jingneng and Haiyou’s price movements. Now, let’s briefly “predict” what might happen on 3-20:
(1) Jingke Energy and Haiyou New Material both fall sharply (solar industry downturn): their gains and losses hedge each other, expected profit for the day is zero. Since Jingneng is out of redemption risk, this combo essentially becomes a super cheap bullish option on the solar sector.
(2) Both rise sharply (solar industry boom): Jingneng’s situation is complex, so not detailed here. As long as Haiyou Convertible Bond rises by at least 2%, the overall profit > 0.
(3) Both stay flat: Haiyou Convertible Bond remains unchanged, Jingneng Convertible Bond gains 2%.
(4) Jingke Energy surges but not too close to redemption price, while Haiyou New Material drops sharply: both bonds lose at most 2%.

As you can see, except for scenario 4, all others are risk-free profits. Scenario 4 implies Jingke Energy can manipulate stock price and trend even in a weak sector, so why wait until the rolling countdown nears its end to show strength? I personally believe the probability of scenario 4 is very low, and the potential loss is limited.

Of course, everyone knows what happened on 3-20: Musk boosted solar, Haiyou New Material (convertible bond) rose up to 17% (13.4%), closing at +13.5% (8.7%), Jingneng Convertible Bond rose up to 2.6%, closing at +0.6%. Since Jingke Energy closed at 7.61, redemption risk was temporarily lifted, and next Monday, Jingneng Convertible Bond should open at least 1% higher.

That’s roughly my current thinking. Although Haiyou and Jingneng are extreme examples, I personally believe similar investment opportunities still exist in a bull market. Welcome rational discussions.