Bad Bet with the PENN merger arb opportunity
Posted on Tuesday, July 8th, 2008 | In Stocks to WatchAs the termination news on the Penn National Gaming (PENN) merger hits the wire on July 3rd, I realized that I need to bring closure on one of my trading ideas. In my previous PENN merger arbitrage post, I entered into a ”paper-trade” hoping to capture +20% return on 419 shares. Since then, the credit crunch hit this trade in full force dropping the PENN stock price to a trading range of $40-$45/share for about 3 months and then recently pushing the price to approximately $30/share.
Here is the latest 6 month stock price chart:
Updating my trade details for the closing price on July 3rd, the results are ugly….
- Sell 419 shares at $29.66 with a $10 trade commission equals $12,418
- Less my original investment of $25,003
- Net Gain / (Loss) = $(12,586) or (50.3)%
- S&P 500 % gain in the same time period was 17.7% gain
Overall, this is why I have a “paper-trade” account to make sure I understand all of the risks and rewards of a particular strategy and remember these lessons learned when I establish my real money account. With these results, I question how do the hedge funds that employ merger arb strategies protect themselves with the real money accounts? Do they use put options or balance all of the merger arb bets within a larger portfolio…
If you would like to see my other trading ideas and keep track of my results, feel free to subscribe to Finance Puzzle.
Author Disclosure: I do not own any shares of PENN or FIG. This strategy is highlighted for entertainment purposes for my mock short-term portfolio.
Sources:
Company website
SEC Edgar website
Yahoo Finance
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 About Elias Tsepouridis (http://www.financepuzzle.com)
Elias Tsepouridis has 10 years of corporate financial management and valuation experience. He is a freelance writer who has managed his own portfolio for the last 5 years. Elias publishes and tracks all of his investments on his blog FinancePuzzle.com. His detailed analysis focuses on purchasing stock of businesses with long-term value and growth potential at a price that includes a safety of margin. Elias analyzes one stock per week, which is recommended by his subscriber base. |
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