There are two schools of thought about how Mr market behaves. Efficient and Not Efficient market theory, simply. I surely don’t belong to Efficient Market Theory (EMA) school. I believe that markets are irrational time to time and can remain so sometime even for long periods.
Let me share with you a very recent example. CME (CME) last week announced that it was buying Nymex (NMX) for $9.4 billions. Under the terms of the agreement, Chicago-based CME will pay 12.5 million shares — valued at $6 billion based on the stock’s Friday closing price of $486.05. Nymex holders will receive 0.1323 Class A shares of CME Group and $36 in cash for each share outstanding.
Markets generally discount the company that is being acquired, reflecting the uncertainty. Attached is a simple excel model that told me the arbitrage opportunity, currently it is $8.94 almost the same price that I mentioned on OP Discussion forum after the announcement.
But during the trading hours, it discounted NMX by a whopping $23 vs average $8-10. I am attaching a chart that I formulated to display the arbitrage opportunity. It is displaying NMX movement on a 2min chart. I could have used on options but by the time I could think of anything, it was all back. Check it out before and after that “irrational” period. Of course there was uncertainty in the market as well so I also booked my profit quickly.
This was my first time playing M&A, a good lesson and something to craft further before I include it in my strategy toolbox.
More to come, Profitable trading, OP
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