Arbitrage Spread Big Enough to Play in CAPS
In most acquisition deals, the spread between the current stock price and the deal price is too narrow to make a CAPS play. However, I stumbled across one while researching a recent bond article that has a big enough spread make the play interesting in CAPS.
The company is Pharmasset (VRUS). It's a clinical stage pharma company, meaning it has some products in the pipeline, but nothing on the market generating revenue.
On a business operations basis, this isn't the type of company I'd be interested in - way outside my risk comfort zone. However, the play here has nothing to do with the business operations. VRUS closed today at $125.30. Gilead (GILD) has offered to buy the company for $137 per share.
A 9% spread is big enough for a CAPS pick to work out as long as:
a) the deal doesn't fall apart and
b) SPY doesn't go up by more than the spread before the deal closes
c) if SPY is up less than 4%, it'll count toward accuracy.
This isn't risk-free points. VRUS was trading in the low $70's before the deal was announced and it's reasonable to assume it would head back to those levels if something happened to squash the buyout. But, Gilead has already sold bonds to raise money for the deal - doesn't mean it's a done deal, but it's a step in that direction.
I made the CAPS pick a few days ago and am currently a little in the hole with it.
I'm also thinking about a small real-money dice roll on this. Since I'm a Fool contributing writer, the disclosure policy means I have to wait at least two business days before I can make a trade in VRUS after writing about it in an article, blog or on the boards. Bonus for me is that gives me two days to come to my senses before doing something stupid.
Not responsible for lost CAPS points if you follow my lead in the game or lost dollars if you make the real life gamble.
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Disclosure: No position in any company mentioned.