: Why buy options instead of convertibles? If call options allow purchasers to buy at a predetermined price and convertibles serve the same function with interest and also less risk(only bankruptcy), why buy them instead of

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Call options and convertible preferred stock (CPS) have similarities and differences.

Technically. a preferred stock is a stock in a company's capital structure but it has many features of a bond. Its dividend rate is usually fixed (some are floating) and issuers have the right to redeem them after the call date at a fixed amount. Its price will not track that of the common unless the common is going into the toilet. Because of this, preferred stock considered more similar to a bond than to common stock.

Convertible preferred stock provides current income (dividends) and growth potential if the common appreciates. The terms of the convertible's conversion makes it similar to options (exercisable at the strike price). Both will track the price of the underlying but not necessarily identically.

The conversion feature changes the nature of preferred stock. Because the value of the preferred shares and the common shares are linked, two factors affect the convertible preferred stock's price. Above the effective conversion price, the convertible preferred stock will track the price of the common. Below effective conversion price, the convertible preferred stock will tend to move in tandem with the bond market.

In terms of liquidity, convertible bonds tend to be illiquid and counter parties are often few and far between. Convertible preferred stock usually trades on major stock exchanges with more liquidity. Options run the gamut from illiquid to so heavily traded that the B/A spreads are pennies wide.

And then there's the issue of price convenience. A company may issue only one or several convertibles which means that there may be one or only a few possible conversion prices. Not that they would all be useful but a stock like GOOG has nearly 300 different strike prices to choose from.

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In one sense, the main reason is availability, although fundamentally the two are completely different things.

Convertible Preferred Stock can be issued by a company for fund-raising purposes as an alternative to regular shares/stocks, and includes the option of converting the preferred shares to regular shares. See Convertible Preferred Stock on Investopedia for more detail.

Call Options on the other hand are created "by the market" and give the holder the right to buy the underlying stock at a specified price ("strike price") up until a specified date. See Call Option on Investopedia for more detail.

So – while they are superficially similar in some ways: both can be traded on the open market, both come with the option of converting into "regular" stock; the big difference is availability. Convertible stock only exists if a company decides to issue it. The supply of them (for a given company) is limited to the number issued, and will decrease as and when people convert them to regular stock. Call options are created by the market and this can happen for any stock at any time.