Another Whale in the Sea

[core]

Ceteris paribus, the value of a note decays the same way, ....

Care to elaborate more?

Yes I'm eager to hear this explanation as well.  A current note does not "decay" in value.  As payments get made, sure the par value of the note is less but the cash you received does not just vaporize.

[Rob L]

Looks like an apples to oranges comparison. Notes behave like an underlying, not an option. I find it hard to force fit any of the greeks to them, with the possible exception of rho.

As an underlying, notes do have an option embedded within them; the pre-payment option. Dr. Friedman's NTANSTAAFL implies  that the interest rates we receive are higher than they would otherwise be were it not for our implicit sale of this option when we buy a note. That option's value does decay with time (to the lender's benefit). Since the lender is short this option you could actually claim a negative theta on that.

[Fred]

My comment was directed more to the specific strategy of buying notes at -95% and re-selling at -93%. Yes, the strategy can provide double-digit returns if it is properly executed.

Nice! And, hello competitor.

What's the time horizon for an average trade?  3 days?  The annualized returns could be in the 4-digit territory.

[bobeubanks]

Ceteris paribus, the value of a note decays the same way, ....

Care to elaborate more?

Yes I'm eager to hear this explanation as well.  A current note does not "decay" in value.  As payments get made, sure the par value of the note is less but the cash you received does not just vaporize.

Yes, I am talking about par value. Once a payment is made, that cash is irrelevant to the par value of the note. Payment history is still relevant, but as far as time decay of value those payments are not.

You aren't going to pay the same for a note with a year to go as you would for a note with a month to go, right? If you are going to make analogy to option pricing, theta is negative.

[Bohb Daishi]

My comment was directed more to the specific strategy of buying notes at -95% and re-selling at -93%. Yes, the strategy can provide double-digit returns if it is properly executed.

Nice! And, hello competitor.

Not really anymore. Ever since they shut down bankrupt note trading, the market for this strategy has dried up significantly. Even then, the strategy would only make like $20-50 a month. There's a reason why this is the only strategy that I have openly shared in these forums - I save a lot more time (and even a little money) by encouraging people like you buy my trash notes at a better discount than I would otherwise get if I fire-sold them. Helps reinforce and even raise the price floor in the market. 

But every now and then some big whale comes along and gobbles up all the notes. This forces you to either purchase at otherwise profitless price levels hoping the whale sticks around long enough to front-run them, or to completely get out of the market until conditions change. Welcome to the world of trading, my friend. Fun fact: this is one of the most common strategies used by trading firms today.