OATS -- worth a gamble? (arbitrage bet)

[Shoe]

[ QUOTE ]
[ QUOTE ]
I also don't know the likliehood of the deal getting approved, which is the only thing stopping me from buying them at this point.

[/ QUOTE ]
Right, so basically you don't know anything relevant. On the bright side, that and $500 will get you an iPhone.

[/ QUOTE ]

Right, which is why i made this thread. I thought since this is an investing forum it could generate some good debate. I also didn't say this is something I would be doing in a mutual fund. I'm trying to learn about different aspects of the market that I am not as familar with. I didn't come on here saying OATS is the next NTDOY or something, or even recommend OATS to anyone for that matter.

[Evan]

[ QUOTE ]
The only way I can see shorting WFMI working is if you were sure they would drop more than OATS if the deal is blocked, and go up less than OATS if the deal is approved, which does seem reasonable to me, which means you could lock in a profit either way. The part i'm not sure on is the which stock would get hit worse if the deal is blocked.

[/ QUOTE ]
Seriously, can you just wait a little longer before you post and read these things out loud?

[Shoe]

[ QUOTE ]
[ QUOTE ]
I understand that we usually think of arbitrage as "riskless" selling/buying of nearly identical securities/bonds, but the standard definition of what OP is talking about is merger arbitrage. All mergers are uncertain, and all merger arbitrage involves estimating the risks of deal failure and figuring out whether you are being offered the right odds on the gamble, and hedging risks when possible.

I've done a decent amount of merger arbitrage and the spread the OP is describing is huge. It indicates a high likelyhood of deal failure. I usually use the pre-deal announcement average price (over a month or 3 months) as the price in a deal failure scenario. And if the deal is a stock deal you have to short the acquirer to lock in the spread. Because of this I prefer all cash deals.

It's pretty simple to figure out what % likelyhood of success the market is estimating, given the failure price vs. win price. Your job is to determine whether you think that's reasonable or not, and if not, whether there is a big enough margin of safety to take the gamble.

[/ QUOTE ]
You're going like 8 steps beyond OP. Seriously, his post (and probably thought process) was pretty much, "Merger being discussed and current price<offer BUYBUYBUY!" Spin in however you like, that's not any kind of arb.

[/ QUOTE ]

I've heard arbitrage discussed like this many times before, including in a previous thread or 2 in this forum, that everyone accepted as truth at the time. I guess when I create a thread everyone just likes to jump all over it.

[Shoe]

[ QUOTE ]
[ QUOTE ]
The only way I can see shorting WFMI working is if you were sure they would drop more than OATS if the deal is blocked, and go up less than OATS if the deal is approved, which does seem reasonable to me, which means you could lock in a profit either way. The part i'm not sure on is the which stock would get hit worse if the deal is blocked.

[/ QUOTE ]
Seriously, can you just wait a little longer before you post and read these things out loud?

[/ QUOTE ]

That makes perfect sense to me.... someone please explain to me why else you would short? If the deal gets approved, both stocks are going up. If it gets blocked, both stocks are going down. If they went up or down at the same rate, shorting would ensure that you neither make nor lose money on the trade, which would make it pointless. How does that not make sense?

[Evan]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
I also don't know the likliehood of the deal getting approved, which is the only thing stopping me from buying them at this point.

[/ QUOTE ]
Right, so basically you don't know anything relevant. On the bright side, that and $500 will get you an iPhone.

[/ QUOTE ]

Right, which is why i made this thread. I thought since this is an investing forum it could generate some good debate. I also didn't say this is something I would be doing in a mutual fund. I'm trying to learn about different aspects of the market that I am not as familar with. I didn't come on here saying OATS is the next NTDOY or something, or even recommend OATS to anyone for that matter.

[/ QUOTE ]
I'm not saying you did any of those things. You just seem to be really anxious to post lots of stuff without thinking about it and that makes for frustrating threads.

[jws43yale]

I love how Shoe has decided he is an investing god b/c he realized he though the Wii was sweet and bought Nintendo stock. That is pretty much his seeling point as to why he is such a great investor.

[Shoe]

[ QUOTE ]
I'm not saying you did any of those things. You just seem to be really anxious to post lots of stuff without thinking about it and that makes for frustrating threads.

[/ QUOTE ]

I apologize. That is definitely not my intent. I think I really need to find an investment club or something that I can join because I can't stop clicking on this forum and anxiously await any reply to any thread I am watching. I'll try to be more coherent in the future.

[Evan]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
I understand that we usually think of arbitrage as "riskless" selling/buying of nearly identical securities/bonds, but the standard definition of what OP is talking about is merger arbitrage. All mergers are uncertain, and all merger arbitrage involves estimating the risks of deal failure and figuring out whether you are being offered the right odds on the gamble, and hedging risks when possible.

I've done a decent amount of merger arbitrage and the spread the OP is describing is huge. It indicates a high likelyhood of deal failure. I usually use the pre-deal announcement average price (over a month or 3 months) as the price in a deal failure scenario. And if the deal is a stock deal you have to short the acquirer to lock in the spread. Because of this I prefer all cash deals.

It's pretty simple to figure out what % likelyhood of success the market is estimating, given the failure price vs. win price. Your job is to determine whether you think that's reasonable or not, and if not, whether there is a big enough margin of safety to take the gamble.

[/ QUOTE ]
You're going like 8 steps beyond OP. Seriously, his post (and probably thought process) was pretty much, "Merger being discussed and current price<offer BUYBUYBUY!" Spin in however you like, that's not any kind of arb.

[/ QUOTE ]

I've heard arbitrage discussed like this many times before, including in a previous thread or 2 in this forum, that everyone accepted as truth at the time. I guess when I create a thread everyone just likes to jump all over it.

[/ QUOTE ]
Dude, seriously, how the hell is this arbitrage? How is this any more arbitrage than picking a random stock and just guessing it will go up with no further analysis?

[Evan]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
The only way I can see shorting WFMI working is if you were sure they would drop more than OATS if the deal is blocked, and go up less than OATS if the deal is approved, which does seem reasonable to me, which means you could lock in a profit either way. The part i'm not sure on is the which stock would get hit worse if the deal is blocked.

[/ QUOTE ]
Seriously, can you just wait a little longer before you post and read these things out loud?

[/ QUOTE ]

That makes perfect sense to me.... someone please explain to me why else you would short? If the deal gets approved, both stocks are going up. If it gets blocked, both stocks are going down. If they went up or down at the same rate, shorting would ensure that you neither make nor lose money on the trade, which would make it pointless. How does that not make sense?

[/ QUOTE ]
You don't see anything weird about the sections I bolded? You basically said, "Hey man, makes sense that WF would drop more if the deal gets blocked, good call! Damn, sure would be sweet if I could figure out which one would drop more if the deal got blocked."

[Shoe]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
I understand that we usually think of arbitrage as "riskless" selling/buying of nearly identical securities/bonds, but the standard definition of what OP is talking about is merger arbitrage. All mergers are uncertain, and all merger arbitrage involves estimating the risks of deal failure and figuring out whether you are being offered the right odds on the gamble, and hedging risks when possible.

I've done a decent amount of merger arbitrage and the spread the OP is describing is huge. It indicates a high likelyhood of deal failure. I usually use the pre-deal announcement average price (over a month or 3 months) as the price in a deal failure scenario. And if the deal is a stock deal you have to short the acquirer to lock in the spread. Because of this I prefer all cash deals.

It's pretty simple to figure out what % likelyhood of success the market is estimating, given the failure price vs. win price. Your job is to determine whether you think that's reasonable or not, and if not, whether there is a big enough margin of safety to take the gamble.

[/ QUOTE ]
You're going like 8 steps beyond OP. Seriously, his post (and probably thought process) was pretty much, "Merger being discussed and current price<offer BUYBUYBUY!" Spin in however you like, that's not any kind of arb.

[/ QUOTE ]

I've heard arbitrage discussed like this many times before, including in a previous thread or 2 in this forum, that everyone accepted as truth at the time. I guess when I create a thread everyone just likes to jump all over it.

[/ QUOTE ]
Dude, seriously, how the hell is this arbitrage? How is this any more arbitrage than picking a random stock and just guessing it will go up with no further analysis?

[/ QUOTE ]

It's not just pure speculation though. There is an offer price on the table (in this case $18.50 per share). You are analyzing the risk of the deal going through vs. not going through. You buy if the chances of the deal going through outweigh the risks of how much the stock would drop if the deal does not go through.

Before I started this thread I thought merger arbitrage was the only form of arbitrage. I did not realize there was another form where you are buying/selling at the same time for an instant, risk-free gain.

The method I am talking about in this thread has been used by Warren Buffet many times in the past, and is part of the reason he was so successful early in his career.