any good literature on how one goes long the company’s credit vs. going the long the spread via CDS instruments?
Could you refine your question a bit? I work with CDS but I’m not sure what you’re asking.
i was thinking what CDS trades one would use if i was bullish on a company’s bonds or i was bullish on that company’s credit, using complex CDS trades such as basis trades, index trades etc. i know i would sell a CDS in a plain vanilla scenario but was wondering about the complex ones.
I remember the following: Basis trade: long a company’s bond, and long the corresponding CDS. You receive the bond’s coupon, and you pay the premium for the CDS, which reduces your coupon. If what is left of it is still higher than the coupon of a T-bond, then you’ve made a great deal because like the T-bond, you don’t have any credit risk, but you get higher cash flows.
Curve trades: -curve flattener: long ST CDS, short LT CDS. This works if short term credit risk goes up, but in the long term credit risk is reduced. The ST CDS will become more valuable. -curve steepener: the other way around, short the ST CDS and long the LT CDS. Not sure if that answers your question, but these are two strategies with CDS.