In other words, CHK converts are a great idea as long as you aren't looking for current yield (because of the low 2.25% coupon on the convert) and you don't think CHK will default. The 10-year CHK unsecured bonds (7.25% due 12/15/18), which have a higher claim on the company's cash flows than the converts, are trading at 76 cents on the dollar for a 11.2% yield to maturity. The CHK 2.25% converts are trading at 47.5 cents on the dollar for a 11.0% yield to the 2018 par put.
Even though you are paying a high premium over the bond value because of the low dollar price of the convert and high volatility of the underlying stock, you are STILL basically buying the option for free. The convert is essentially trading "busted" (meaning the equity option has little to no value). While the $85.90 conversion price is far out of the money, it should still be worth something as time is a big component in pricing options and the call/put isn't until 2018. You are buying the option for free AND you are committing less money up front to own the security ($475 per $1000 bond instead of $760 per $1000 bond) than you would to own the bond while achieving, at a minimum, the same yield of roughly 11%.
Position: CHK common
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