There are many investment strategies that best work in a market that’s moving in a direction, whether up or down. In sideways markets, other strategies, often related to income, tend to perform better. While the market is likely in a decline, but is prone to some strong rallies along the way, only a few strategies offer a solid prospective return.
One such strategy is arbitrage. It’s best known for trying to find immediate price differences in an asset across markets.
However, for a company that’s about to be acquired via a merger or buyout, investors can potentially earn an excellent annualized return by buying shares below the buyout price. While the percentage return may be small, the certainty of a payout makes up for the risk.
Right now, investors have soured on one of the biggest potential merger opportunities out there today, the acquisition of Activision Blizzard (ATVI) by Microsoft (MSFT).
However, the company is a smaller play for the big tech giant, and concerns over regulatory uncertainty appear overblown.
Action to take: Investors who buy shares of ATVI ahead of the acquisition are now looking at a safe return, as shares are going for under $80, with a buyout offer at $95. There’s even a modest 0.6 percent dividend yield to wait.
For traders, option premiums aren’t fully reflecting the potential merger right now. The December $85 call, last going for about $2.05, could run as high as $10 on the buyout going forward at $90. For now, with markets still oversold, even a short-term trade could be worth a quick mid-double-digit gain.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.