The Prop Trader's Chronicles: Short-Term Proprietary Trading Strategies for Both Bull and Bear Markets

INTRADAY M&A SCALPING STRATEGIES

Some proprietary trading firms in Toronto have been known to employ intraday mergers and arbitrage strategies. One of the simplest forms of these was used by a firm that simply watched for stocks that would be bought out with a cash offer. If, for example, the buyer has offered to buy a company at 12.50 per share, and a casual observation of the recent market action has been a strong intraday support at 12.30 and typically ranges tightly between 12.30 and 12.45 due to time value, the trader can begin scaling into positions around 12.29 to 12.35 and taking profits between 12.42 to 12.44 by adding liquidity on both sides of the trade.

While there are far more complex methods of playing M&A risk arbitrage, including variations involving options contracts, this simple intraday scalping technique has been sufficient for some traders when the right deal comes along. The primary risk to these strategies is unexpected announcements that might cause the market to doubt that the deal will hold up. Of course, there are also cases when these trades could deliver far larger profits than expected if a trader happens to be in a long position when a new buyer's bid for a controlling stake in the company at a higher price hits the news. It wouldn't be constructive to expect such events when planning the strategy, but they're also not impossible occurrences if you scale in and out of these trades often.

The main attribute that can make these strategies work is if ...