Short CDS hedged with long stock positions makes sense, says CDR

Buying protection on certain credit default swaps and simultaneously buying stock in those names is recommended by analysts at Credit Derivatives Research. They say the best capital structure arbitrage trades currently are RadioShack, Honeywell and Centex Corp. They like buying CDS protection on the names and hedging with long stock positions. These names, among a list that includes Belo, CenturyTel, Dean Foods and Dow Chemical, are liquid credits that are furthest away from their fair values, they say. If liquid options are available, they also like buying Belo protection hedged by selling puts.
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