Risk Arbitrage

What are Risk Arbitrage Strategies (or Merger Arbitrage Strategies)?

Investment strategies that aim to make money off of companies merging or acquiring one another.  Risk arbitrage usually refers to one of three flavors of arbitrage that contain an element of risk:

  • Merger and acquisition arbitrage - The simultaneous buying long stock in a company being acquired and selling short the stock in the acquiring company.  Until the acquisition is completed, the stock of the target typically trades below the purchase price. An arbitrageur buys the stock of the target and makes a gain if the acquirer ultimately buys the stock.
  • Liquidation arbitrage - The exploitation of a difference between a company's current value and its estimated liquidation value.
  • Pairs trading - The exploitation of a difference between two very similar companies in the same industry that have historically been highly correlated. When the two company's values diverge to a historically high level you can take an offsetting position in each (e.g. go long in one and short the other) because, as history has shown, they will inevitable come to be similarly valued.

Why You Care

A good strategy to be aware of, even if you do not plan on learning and using it.  Public companies merge and acquire other public companies all the time.  At some point, your portfolio will have a stock of a company merging with another company or acquiring one.

This strategy is not risk free. Risk arises from the possibility of deals failing to go through. Obstacles may include either party's inability to satisfy conditions of the merger, a failure to obtain the requisite shareholder approval, failure to receive antitrust and other regulatory clearances, or some other event which may change the target's or the acquirer's willingness to consummate the transaction. Such possibilities put the risk in the term risk arbitrage.

Risk Arbitrage Simplified

Imagine you are a gambler who plays the odds. That in a nutshell sums up the essence of risk arbitrage. In a game of roulette, one option is to bet on red numbers or black numbers, which would amount to a fifty percent chance of an even payout; however, since there are two green numbers, their existence offsets the even percentage. A player who would be betting against the red or black would be playing the substantial odds of hitting green.

Translated to investment: Hypothetically, if Joe's taco shop were publicly traded at $50.00 per share, and Sam's taco shop moved to take over Joe's taco shop at a proposed $65.00 per share, this means Joe's taco shop's shares are instantly worth $65.00 per share. The game comes into play because those same shares are currently trading at only $50.00 per share, should the buyout occur. If the early trades (restricted or non-retail trades) elevate the value up to $60.00 per share, there exists the $5.00 difference. This is the entrance of risk arbitrage. The risk inheres in the chance that the acquisition may not be completed, in which case the price per share will reduce to the original $50.00 per share.

Advanced 0 Users Collected

Strategy Details

Market Merchandise: Hedge Fund,
Players: Corporation, Hedge Fund Firm, Investor,
Strategies: Volatility Arbitrage,

Download Our Free eBook

25 Stock Market Indicators To Know

And subscribe to our MarketHeist Guides newsletter!

Free Brokers, Software, & Tools to Start.

Start with Brokers that have free accounts and professional grade software. Software that's the same whether you're practicing with fake money or trading real money.

Submit a Service

Profile Photo

TD Ameritrade Online Broker

With free thinkorswim, Trade Architect, & mobile software. Practice with virtual money. Invest and trade in stocks, ETFs, mutual funds, bonds, options, futures, and forex. No minimum and no maintenance fees. $0 to start.

☆ Collect Launch

Profile Photo

tradeMONSTER Online Broker

Free browser & mobile software. Easy to use technology including strategySeek and paperTRADE. Invest and trade in stocks, ETFs, mutual funds, bonds, and options. No minimum and no maintenance fees. $0 to start.

☆ Collect Launch

Profile Photo

optionsXpress Online Broker

optionsXpress offers an innovative suite of online brokerage services for investor education, strategy evaluation and trade execution. No minimum requirements.

☆ Collect Launch

Learn The Business. Take A Course.

What is the market and how it works
Finding Opportunities (with Technical Analysis & Fundamental Analysis)
Planning & Safety (with strategies to make smart decisions.)
Plan Execution: Buying & Selling

Submit a Service

Learn Stocks

Profile Photo

Investools Investing Foundations Program

Get trained in the foundations of the stock market and stock trading with two courses, a wealth of easy-to-use tools, and top-tier coaching support, in the program that helps you start managing your own portfolio. In the Investing Foundation Program, you’ll enjoy live and online workshops that can help you quickly overcome fears and learn […]

☆ Collect Launch

Learn Options

Profile Photo

OptionsAnimal Apprentice Options Education Program

Description Build your knowledge from the ground up. Understand key concepts and learn the basic spread trades that will give you a foundation to trade successfully. Learn how to properly structure a trade using the Protective Put, Covered Call, Collar Trade as well as applying the Straddle/Strangle. Trade Adjustment Spread Trades OptionsAnimal Trader Professional Program […]

☆ Collect Launch

Learn Futures

Profile Photo

OpenTrader Professional Training Program

The industry’s only training program built by professional full-time traders. You used to have to get hired by a professional trading firm to get world-class training. Not anymore. If you’ve been a losing trader, getting beaten down by the market again and again, low on confidence and full of doubt, things are about to change […]

☆ Collect Launch

On-The-Job Training. Earn While Learning.

Follow Live Trades, Step By Step
Detailed Trade and Market Analysis
Explanations of Strategies and Tactics
Questions Answered in Webcasts & Chatrooms
Learn by Copying The Pros At Every Step

Submit a Service

Learn Stocks

Profile Photo

Mish’s Market Minute Premium Stock Picks Video Subscription

Live-in-the-market instruction showing you how to trade in the afternoon the choice stock and ETF picks vetted by MarketGauge’s tools earlier in the day. Video up to 15 minutes: 4 times a week (M/T/W/Th) by 1:30PM ET $124.97/month Includes ETF Monitor & Nuggets List Private real-time Twitter Alerts 2 week FREE trial Learn as Mish: […]

☆ Collect Launch

Learn Options

Profile Photo

stockguy22 Live Trading & Education for Part Time Traders

What You’ll Get Learn stocks and options trading at your own pace from a group of full time traders dedicated to teaching through live trading, education, and mentoring.  See how trading is done methodologically as an occupation on a daily basis, from beginning to end.  Start with the daily in-depth analysis of stocks, the overall […]

☆ Collect Launch

Learn Futures

Profile Photo

Emini Wizard Trading System & Live Trading Chat Room

Thanks for considering The Emini Wizard System: This system is available for purchase for people who want to make a one time investment for the entire program. You get: Access to the Member’s website Spreadsheets Common plays Special plays Trade logic explained Chart patterns Chart settings we prefer Separate active chat area (30 days free […]

☆ Collect Launch

Some Partners We've Worked With

  • Download Our Free eBook

    25 Stock Market Indicators To Know

    And subscribe to our MarketHeist Guides newsletter!