Genuine arbitrage opportunities are rare, and rarer still in the stock market (as opposed to assets like currencies).
Real Money's Paul Price sees an opening in the recently announced deal in which Citizens Financial Group (CFG) - Get Citizens Financial Group, Inc. Report is set to be acquired by Investors Bancorp (ISBC) - Get Investors Bancorp Inc Report in a $3.5 billion cash-and-stock deal. Get more investing insights and trading strategies from Price and the other contributors on Real Money.
"When deals include a large stock component, arbitrage opportunities arise. In this case "big money" traders could short CFG while buying ISBC at a slight discount to its true value when the merger closes."
Investors should always take the opportunity to learn about new sections of the market, and this is great one.
Arbitrage happens when you get the opportunity to buy and sell the same asset in different markets, taking advantage of a price differential across markets in order to profit. When it arises, arbitrage is one of the few ways to secure nearly-guaranteed profits. If someone will sell you a stock for $1 and someone else will buy it for $1.10, you’re in business. The trick, of course, is pulling it off.
So why does Price think that the CFG/ISBC merger creates a potential opportunity?
"Independent research house Morningstar (MORN) - Get Morningstar, Inc. Report rated CFG as a 4-star (out-of-five) 'Buy' before the dip. Their computer-generated, present-day fair value estimate for the shares was $50.88. That number was calculated prior to [the] large Q2 earnings beat as well."
"If you like CFG at around $42 it's hard not love it at worst-case entry points of either $39.10 or $40.30. CFG could easily be up to around $55 to $60 within six to nine months. Buy some shares, sell some puts or consider doing both," Price wrote in his column earlier this month.
Citizens Financial Group shares fell 2.15% on Tuesday to close at $43.32.