If you squint and look at a corporate bond funny, it has an asymmetric payoff profile that looks an awful lot like selling a put option on common equity. If the

If you squint and look at a corporate bond funny, it has an asymmetric payoff profile that looks an awful lot like selling a put option on common equity. If the company does badly you can lose up to a certain maximum, and if it does well you get to book a little bit of profit. Everything else is relatively unimportant bookkeeping and technical details that I am not familiar with because this is a member of "things I read about and found interesting and understood", not "things I have done in the market to make money". You can take on the equity risk either by delta-hedging it and shorting the underlying stock like you would when selling options, or you can buy options written by people who likely end up doing delta hedging. On the bond side, you can either buy the underlying and hedge interest rate risk in the treasury futures market, or you can take aim at the credit default swap market and buy/sell the credit spread directly. Either way, you're basically just modeling the relationship between different prices in a company's capital structure and noting how much money your combined position makes if prices converge at either corporate success or bankruptcy. > What's the sticking point here? What if you have competitors doing the same arb? You have competitors doing the same arb, there's no free money to be made. My point is that when a company decides to sell bonds, there are people who will buy it based off the solvency risk implied by equity option prices. > Seems like it's not a pure guaranteed arb. It's not, but the side I described generally doesn't have lurking steamrollers to run you over. Model breakdown is a thing that happens, especially during crises, and especially if you slightly under-hedge to avoid paying carry costs for the "equity does badly but no bankruptcy" profit case. Plus, there's no guarantee that buying put options or shorting common equity will make a profit if the underlying company goes kaput (for example, if trading is suspended in the underlying, your options can expire or your short position can charge you borrow fees while you are unable to legally purchase shares to deliver into the contract or to close your short).