As mentioned in my post about Hedge fund strategies (http://www.investinstuff.com/2016/06/27/hedge-fund-set-strategies-can-give-handsome-returns/), I am also using some of the presented strategies to grow both my trading and my investment accounts.
Merger arbitrage strategies
My take on the merger arbitrage works the following way basically, I look out for Merger announcement news, as soon as there is a news in the media it needs to be analyzed for the following characteristics:
- generally, merger talk no prices mentioned
- hostile merger talk with takeover prices
- friendly merger talk with takeover prices
- other unclear and unprecise talk about mergers
From the few listed types of takeover news, you need to watch out for friendly merger talks which provide also a fair takeover price for the stockholder, a nice example which I am currently trading is MSFT and LNKDN (http://news.microsoft.com/2016/06/13/microsoft-to-acquire-linkedin/). On the provided link is a clearly price commitment from MSFT stated, also a timeframe of the next 6month was mentioned. Therefore our trading opportunity lies in the difference of the currently traded stock price and the announced take over price.
How to trade/invest in this opportunity?
- directly BUY stock of LNKDN (delta of current price and 196USD would be your profit)
- sell short Puts – ATM- leaps options at a good price and near the takeover price, Strike = 185USD,190USD (your profit ist the full option premium)
What you should avoid in trading/investing arbitrage strategies?
Avoid stock which are only in general merger talks without any commitment, this could lead to dangerous and volatile GAPS in both directions, also watch out how the takeover will take place –> MSFT and LNKDN takeover is to be done by CASH payment, but certainly other takeover are via stock exchange which means the stock of the company that will be merged will be replaced with stocks of the merger company.
I hopes this gives you an inside guys and it helps.
For questions on arbitrage strategies or more info just leave a post.