What happens when a company gets bought and you are caught short?

ndtrader14a · Jun 13, 2016

LinkedIn got bought by Microsoft today, and within a few seconds of the markets opening, LinkedIn has rocketed up by 47%. I am wondering what happens under such conditions to people who were caught short at market opening. Is there enough liquidity available for them to buy and exit quickly?

On a related note, what precautions should swing traders take while shorting?

2rosy · Jun 13, 2016

if you're short you lose money. yes, there's enough liquidity at a new level.

Scataphagos · Jun 13, 2016

"What happens..."

1. Maybe you get stopped out close to your stop price. More likely, you just eat the most of/the entire move against you.

2. Having an "offsetting" position to hedge against a big and sudden move... like being long calls/puts.

marsman · Jun 13, 2016

ndtrader14a said:
LinkedIn got bought by Microsoft today, and within a few seconds of the markets opening, LinkedIn has rocketed up by 47%. I am wondering what happens under such conditions to people who were caught short at market opening. Is there enough liquidity available for them to buy and exit quickly?

On a related note, what precautions should swing traders take while shorting?

If you didn't trade the right instruments (option spread, hedging etc.) then you have a big problem I would say...

Precautions? Some options stratetgies have built-in hedging. And some of these strategies not even just protect, but also do profit big from such unexpected extreme situations.

Scataphagos · Jun 13, 2016

marsman said:
And some of these strategies not even just protect, but also do profit big from such unexpected extreme situations.

Yes. The "problem" with hedging is the cost. If you have a proper hedge on when it's critical, it's more than just a "life jacket". Problem is the cost. If the hedge goes unused, it hinders returns and/or drains capital. Yet another example of, "there ain't no free lunch". IOW... you can't protect yourself "for free".

marsman · Jun 13, 2016

Scataphagos said:
Yes. The "problem" with hedging is the cost. If you have a proper hedge on when it's critical, it's more than just a "life jacket". Problem is the cost. If the hedge goes unused, it hinders returns and/or drains capital. Yet another example of, "there ain't no free lunch". IOW... you can't protect yourself "for free".

Do it like an insurance company: work strongly with probabilities, then, especially with some cheap OTM options, you can get the protection you like and can afford.

lawrence-lugar · Jun 13, 2016

ndtrader14a said:
LinkedIn got bought by Microsoft today, and within a few seconds of the markets opening, LinkedIn has rocketed up by 47%.
I am wondering what happens under such conditions to people who were caught short at market opening

...What do you think happens...They get F'ed up the A.
That's like stepping on a land mine...if you're lucky...you will only lose one limb... :vomit:

It's trench warfare out there, pal.”

Pekelo · Jun 13, 2016

ndtrader14a said:
what precautions should swing traders take while shorting?

They could apply lube in advance.

OptionGuru · Jun 13, 2016

Pekelo said:
They could apply lube in advance.

Good advice .......... And that would also apply to all the "option selling for income" crowd.

Handle123 · Jun 13, 2016

ndtrader14a said:
LinkedIn got bought by Microsoft today, and within a few seconds of the markets opening, LinkedIn has rocketed up by 47%. I am wondering what happens under such conditions to people who were caught short at market opening. Is there enough liquidity available for them to buy and exit quickly?

On a related note, what precautions should swing traders take while shorting?

I would buy Puts on LinkedIn after it made huge move up, that kind of move often short lived.

Since there are few takeovers of this magnitude, and swing traders going to stay in short term, hedging every short would really cut into profits in big way. Wouldn't it?