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I found a cool risk arbitrage play here that others may find interesting. When the deal was announced, it mentioned that SCTY shares were to be converted into
by a13n 10y ago
I found a cool risk arbitrage play here that others may find interesting.
When the deal was announced, it mentioned that SCTY shares were to be converted into TSLA shares at a rate of 0.11 TSLA/SCTY. Yet SCTY shares were priced at close to 0.097 TSLA/SCTY.
This means there was roughly a 12% profit to be made by buying SCTY shares and shorting the equivalent value of TSLA shares, assuming the deal goes through.
I ended up only buying SCTY shares, effectively buying TSLA shares at $182 (when it was at $203). Now TSLA is at $189 so I only made about 4% but had I shorted TSLA at the same time I would have made the full 12%.
All over the course of a just a few months, not bad. It seemed pretty obvious to me that the deal would go through - though hindsight is 20-20.
It's also interesting to consider that now that SCTY has little downside risk and 20% of SCTY shares are held short, if there will be a short squeeze. Seems like SCTY shares are locked at exactly 0.11 * TSLA so I guess I don't see this happening.
Fun, profitable learning experience. :)
- hayksaakian 10y agoi'm not a financial expert, but does that profit margin represent the small chance that the merger wouldn't go through? can you calculate the exact 'odds' that this arbitrage represents
- a13n 10y agoYeah I mean this stuff is all priced by the market. So it isn't any chance or odds based on facts, rather based on what the market priced the chance of the deal falling through. I felt pretty confident the deal would go through, Elon mentioned that he spoke with many institutional shareholders and they were on board with the deal. Just makes sense that he picks up his own company rather than a competitor. Edit: That's why it's called a "risk arbitrage" play. Arbitrage is when you simultaneously buy and sell the same security at different prices. Risk arbitrage means there's some risk that the securities won't be the same (generally because the merger falls through).
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- devilsavocado 10y agoYou've described the basic merger arbitrage strategy. There are many hedge funds that exclusively do this type of stuff. It's risky though. When a deal doesn't go through you can lose a lot more than 12%
- a13n 10y agoYeah I'm pretty risk tolerant, I went in willing to hold SCTY for the long haul even if the deal fell through.
- ericd 10y agoIt's not clear there would have been a long term to hold it for, their financials weren't exactly pretty, and given how heavily dependent they were on debt raises, a rising interest rate environment would have been tough on them...
- discodave 10y ago> assuming the deal goes through. You're not really doing any kind of arbitrage here you're just gambling that the deal goes through