Barriers to Entry in Markets for Options on Municipal Bonds?
By Art Carden
I learned from my finance colleagues that there apparently aren’t very liquid markets in which I could short-sell or buy put options on municipal bonds. Birmingham has been going around and around about expanding the Convention Center and building a domed football stadium. My oldest and I stayed at the Sheraton downtown last Saturday night (he loves hotels and elevators, so we do stuff like this periodically), and while the Convention Center has a lot of problems it didn’t look from our experience like excess demand was among them.
In his new book Convention Center Follies, Heywood Sanders discusses a debacle in Phoenix in which the bonds issued to build a city-owned hotel were downgraded (iirc). If I’m right about the prospects for a dome in Birmingham, a sure-fire way to profit from my superior insight would be to short-sell or buy put options on the bonds that will be used to finance the venture. Then, when the bonds are either downgraded or defaulted upon, I can clean up.
Alas, there apparently aren’t markets in which people can do this. That’s a shame because, as I argued for DepositAccounts.com recently, financial markets can save the world. Am I missing an obvious trading strategy in which I can profit from my beliefs, which are apparently way out of step with the beliefs of many people in and around Birmingham?