Cookbook of CBOE Credit Event Binary Options (CEBO) - CBOE.com

matter close to a Credit Event because recovery rates typically do not
drive CDS spreads before then.
o Credit traders can arbitrage the basis between the implied spreads in
CEBO prices and the spreads of credit asset swaps in the same way
that they arbitrage the basis between CDS and credit asset swaps.
• Adjust the composition of a long or short exposure to a CDS index or
synthetic CDO.
Basket CEBOs can be used for various investment strategies, including but not
limited to:
• Hedge credit exposures to economic sectors, credit quality sectors or a crosssection
of the market.
• Adjust the sector or quality profile of a broad-based CDS index.
• Hedge the sector or market component of the credit risk in a single name
credit exposure.
• Hedge volatility exposures. The correlations between credit spreads, stock
prices, and volatility typically rise during a financial crisis. This indicates that
a long position in a broad-based CEBO basket provides a hedge against the
extreme volatilities that prevail when worst-case scenarios materialize. Even
at low to moderate volatilities, VIX tracks speculative grade credit spreads.
Credit Spreads
1000
800
600
400
200
0
VIX vs Credit Spreads since 2003
1/10/03 1/10/04 1/10/05 1/10/06 1/10/07
Sources: Standard and Poor’s and CBOE
S&P Speculative Grade Credit Spread
S&P Investment Grade Credit Spread
VIX
16
40
35
30
25
20
15
10
5
0
VIX