Strategies · Library · Stocks
§3.16Event-driven
Event-driven – M&A
After a takeover is announced, the target usually trades a bit below the deal price. Buy the target (and short the buyer in a stock deal) to collect the gap if the deal closes, accepting a large loss if it fails.
- Asset class
- Stocks
- Held for
- Months
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Gap between the target's price and the offer value from the deal terms.
- Entry and exit
- Open after announcement; close when the deal completes or collapses.
- Sizing
- Target long, offsetting buyer short sized by the exchange ratio.
How it fails
- Deal failure causes large losses
- Regulatory delays
- Short leg in stock deals
- Small, steady gains
Data it needs
- merger announcements and terms
- daily prices
ARCANE does not hold deal terms or announcements.
How ARCANE uses it
A Call on whether a named deal closes is a natural fit, but the deal data would come from outside.
Needs deal terms and shorting.
Filed under the event-driven card
US stocks have tended to rise in the 24 hours before scheduled Fed decisions, whatever the decision. ARCANE’s rule goes further than the paper: position before a dated event only when Alpha’s chance differs from the market’s by a stated margin, and close once the outcome is public.
A paper plan from this card holds 1 to 30 days, stops at 1.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §3.16, p. 53 of the SSRN version. Described in our words. Event-driven is ARCANE’s filing, not the book’s.