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That is, when trading stocks against bonds of the same companies.

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    $\begingroup$ Be aware that capital structure trading is not actually an arbitrage (i.e. it is possible to lose money) despite what it is called. The definition of arbitrage is horribly conflated in this circumstance. $\endgroup$ – amdopt Oct 7 '20 at 16:02
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For corporations, it is pretty common and also easy to look at the history of

  • the implied volatility of the out of the money puts on the common equity (note that far out of the money puts are OTC not exchange-traded)

  • the Z-spread of the bonds, or the CDS spread.

When you see their relationship differing from what it's been historically, you can try to understand why it happened, and possibly take a view that it will revert to historical.

This paper (Capital Structure Arbitrage under a Risk-Neutral Calibration by Peter J. Zeitsch, 2017) seems to have a good literature overview.

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    $\begingroup$ Very helpful, thanks! $\endgroup$ – Slow Learner Oct 7 '20 at 4:25

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