Asset Swapped Convertible Option Transaction (ASCOT)
Asset Swapped Convertible Option Transaction (ASCOT) — an investing strategy that is applied to trade the options related to the convertible bonds. According to ASCOT, this option has to be split into a lump sum and volatile capital. These two elements include the corporate bond with stable payouts and an option that behaves like a call option. Such a structure helps the market participants to assess the option in convertible currency without the possibility of the potential nonpayment.
ASCOT has grounded on the idea of asset stripping: a practice of selling the company's assets to make it more profitable for the investors or to reduce the debts. However, such a practice is considered quite controversial because it leads to job loss in the company.
How to apply
ASCOT is often applied by the traders of the converting arbitrage. According to this strategy, the trader opens the long positions (buy) for the converting equity and the short position (sale) for the standard share. The goal is to receive the profit from the ineffective pricing between currency and asset. Such a strategy is quite risky because the converted currency can be very volatile. On the other hand, this convertible part creates the opportunity for the potential benefit.