There are different ways to make money in Mena.
Two popular strategies
The business of arbitraging mergers and acquisitions is known as merger arbitrage. The most basic of these trades involves purchasing shares in the prospective acquiree at a discount to the takeover price with the intention of selling them at a higher price when the transaction occurs.
Combination trades involve holding short positions on target companies while holding long positions on acquirers; if the deal goes through, you’ll profit from the target company’s stock price fall.
Mena gives you three days to settle your bets before it’s random which way the win went, so it makes for a great candidate for combination/merger trades because often, these three days will be the deciding factor in whether the deal goes through or not.
Combination trades with Mena
To put it simply, we will be shorting target companies and buying acquirers before the announcement of a merger/takeover and then waiting three days for the win to go our way.
Once the three day period has passed, we settle out at either 0 (0%) or 100% profit (if the deal went through). Let’s walk through an example together so you can see exactly how this works.
On Monday morning, you buy long positions on target company A and acquirer company B with a $10 spread between them; this means that each share of Target is worth $9, and each share of AcquirerAcquirer is worth $11.
On Monday night, rumours start to fly around that a deal has been reached and the combined company will be named ‘C’. Target stock jumps from $9 to $13, while acquirer stock jumps from $11 to $14.
Using your spread order, you sell one share of Target at 13 and 1 share of AcquirerAcquirer at 14 for a total of 70 cents profit per trade or 35% return on investment.
It happens to be just outside Mena’s three day win period, so whichever way the win ends up going is okay with you; either the merger goes through, and you make 100%, or it fails, and you make 0%.
Now let’s see what happens if this deal goes through.
On Wednesday night, the merger is confirmed, and Target stock drops to $0 while Acquirer stock jumps up to $20. Using your spread order, you sell one share of Target at 0 and 1 share of AcquirerAcquirer at 20 for a total profit of 100 cents or 50% return on investment.
As you can see, even though you bought your positions Monday morning, waited three days for the win to be decided, and held until Wednesday evening, you still made money regardless of which way the win went
It is why combination trading works so well with M&A because Mena gives us three days before deciding who’s right – this can make all the difference between losing 0%, making 0%, making 35%+ vs losing 100%, making 100%, or making 50%+.
These profits are on a per-trade basis, not per share. It means that if you had 20 shares of each stock, the potential profit is 20 cents x 2 = 40 cents on a 70 cent win, and 100 cents x 2 = 200 for a 50 cent win. These numbers exclude spreads and fees.
Merger Trades with Mena
M&A deals can be highly profitable, but they also carry more risk than most other trades.
For this reason, we recommend only making merger trades in highly liquid, high volume stocks such as ORI-EN (ORIGIN), RNVA (RIVERMINER), and EVEP (Evolving Systems), which all have average daily volumes more significant than 5 million shares.
Two weeks ago, ORIGIN announced it was buying RIVERMINER for 60 cents. Since then, ORI-EN stock has dropped by 20% while RNVA has jumped up by 40%; the market is pricing in an 80% chance that this deal fails, which is why we shorted ORI-EN and bought RNVA instead.
Today the merger was cancelled after an even worse offer from EVEP came out of the left-field. Both stocks are traded at precisely the same price as before the deal was announced +60 cents.
Link to Saxo FX broker UAE for more information.