The lottery ticket on BTU has worked pretty quickly. Prices are all over the place on this near-Chapter 11 bond, but I think the offer has gone up to about 7 1/2. I wrote some calls on BTU equity against the position. The logic in this trade is very strong; if the bonds are worth almost nothing, the stock should be worth absolutely nothing. However, there are only a limited number of shares available to short. When this happens, people resort to buying options, and vols go up. The vol of the calls is about 230%; the puts about 300%!

Additionally, rumor has it that there is a big fund with an existing long bond/short equity trade. He is already sucking wind, and may be forced to blow out. We will see.