Options as a hedge with Merger Arbitrage question

[dagnyt]

Quote from ogarbitrage:

Why even own the underlying? Why not just long calls and the acquired, long puts on the acquirer?

IV is likely to get crushed once the deal is done.

Mark

 

[freehouse]

Quote from dagnyt:

IV is likely to get crushed once the deal is done.

Mark

Mark,

IV goes to 0 when the deal gets done.

IV approaches 0 as the uncertainty of the deal's closure goes away. It can go to near 0 on the day the deal is announced depending on how certain the deal will get done according to the underlying terms.

 

[dagnyt]

Quote from freehouse:

Mark,

IV goes to 0 when the deal gets done.

IV approaches 0 as the uncertainty of the deal's closure goes away. It can go to near 0 on the day the deal is announced depending on how certain the deal will get done according to the underlying terms.

NOT TRUE.

The options of the acquiring company continue to trade. And IV is nowhere near zero.

Only the options of the company that was bought for cash go to zero.

And tghat's why (in reply to the question) it's wrong to play the arb with long calls and long puts).

Mark

 

[crgarcia]

Quote from nravo:

What's the best way to use options to protect a spread in a merger arb? Assuming all cash transaction. Two collars? Seems expensive, awkward? How about two short deep ITM options, a call on the long position, a la hedging a dividend capture, and also one on a put on the short position. Is this what pros do?

The ONLY way you can be consistently profitable in merger arb, is to have insider information about the mergers before it gets to the public.