Family members own 65% of Dow Jones (publisher of the Wall Street Journal). They have a deadline of 5 PM US Eastern Time Monday to vote on a bid by Rupert Murdoch for $60 a share. I think the family will vote for it, because I imagine 90% of the 35% who aren't family are hedge funds who want the deal done, to make a quick $5 (trading around $54.70 right now). Pre-takeover, the price was $35, and as the current P/E is a respectable 14, I figure $35 is a conservative downside. So risk $20 to make $5. Better odds than the lottery, and it will be resolved in 24 hours. What I find amusing is all the chatter and action in puts. I think greedy people all want the bigger upside, so most 'risk lovers' are buying puts rather than buying the stock. That is, a $45 put will generate a payoff of greater than the investment. I think people prefer situation where they can risk $5 to make $10, rather than risk $20 to make $5, even if the expected values are the same.
Eric Falkenstein - am 2007-07-30 03:21
Pat L (guest) meinte am 30. Jul, 04:56:
I think that they'll vote for it by a large margin. All of this about journalistic integrity was just posing. It was part of a process that they had to go through. But now they are faced with the real choice of taking a lot of money or being stuck in a real quagmire that they have no idea how to deal with. They are probably up right now drinking expensive wine and rationalizing. About the trade, if you're only going to keep it on one day, how about a smaller position in the August $55 calls selling at $3.60 instead of the stock? Unless Yahoo Finance data or my arithmetic is off, the stock is about 9% up and 36% down (based on your assumptions), while the call is about 40% up and 100% down.
Pat L (guest) meinte am 30. Jul, 05:56:
Now that I think about it a little more, if $35 is a conservative downside, the common could be better because your losses could be somewhat less, while the call is sure to get obliterated if they vote the deal down. I do tend to think that the common will get whacked hard if they vote the deal down without a plan B though.
ed (guest) meinte am 30. Jul, 08:57:
So are you saying that if they vote to take the deal, the stock will immediately go to $60? From what I've seen, takeover target stocks tend to hover a few percent lower until close before the deal closes. If the stock only goes to $58, say, then the upside is only $3.30, which is quite a bit lower than $5.
Tim Worstall (guest) meinte am 30. Jul, 12:33:
Puts?
Err, forgive me for being very dim here, but why would puts be a useful purchase? If the deal goes through then the $45 put is valueless (I have got this right, haven't I? A put allows you to "sell" at a pre determined price?)Or are you saying that those buying the $45 puts are those gambling that it doesn't go through?
Eric Falkenstein antwortete am 31. Jul, 06:35:
yeah, that wasn't clear. I'm assuming half the market is bearish on the deal, half bullish (ie, relative to the probabilities). Your average day trader is attracted to a deal that pays 10 and risks 5 rather than vice versa, so the bears are eating up the puts--they are ignoring the probabilities.
AleksJ meinte am 24. Aug, 20:51:
In hindsight this was very good investment advice :)
