Bear Stearns has structured a reverse convertible with a three-month maturity referencing United States Steel Corp. Reverse convertibles--which pay investors a high coupon providing the reference stock does not fall below a pre-determined barrier--more commonly have one-year maturities.
An official at Bear explained the note was originally structured as a result of a customer inquiry but it is being issued publicly. He declined to name the investor or discuss the motivation behind the short-dated flavor. He noted while one-year deals are more common, in this case, "The math worked." Through the structure the investor is selling a put option on the stock, so the coupon paid is tied to the implied volatility of the equity. Put implied volatility for U.S. steel was at 43% last Wednesday.
The note pays a coupon of 5% at maturity, providing the stock has not lost more than 80% of its initial value. Minimum investment is USD1,000.
