Tuesday, March 25, 2008

Profiting From the Bear Stearns Trade

So we all know that JP Morgan offered to buy Bear Stearns for $2 a share a week or so ago. And by now we also know that JP Morgan increased its bid to $10 a share a few days ago.

This seems like one of the easiest "quick buck" trading opportunities I've seen in a long time, for anyone brave enough to have acted on it. When the initial $2 bid came out, it was so grossly low that many people (myself included) initially thought it was a typo. Bear Stearns employees thought it was crazy, many analysts thought it was crazy, media pundits thought it was crazy, and the market also thought it was crazy... bidding up the stock so it traded at or around the $6 a share level (give or take a few).

It would have been easy to place a bet on an increased bid by buying the stock or the calls after the initial announcement and selling them after the bid went to $10.

"If it was so easy, why didn't you do it, moneyman?"

Well for one, I'm really not a trader by nature. I do have a small trading account so that I can nibble here and there, but I don't have any cash in the account right now. For another, it would have been very risky. In hindsight it's pretty easy to have seen this coming, but before an offer comes out in writing, you're treading on thin ice. If the market had taken a nosedive, or if the due diligence process showed some more skeletons in Bear's closet, that increased bid may have never materialized.

Still, I follow the stock market pretty closely and this was one of those rare situations where it seems like EVERYBODY saw it coming. I'm sure plenty of people profited from the Bear Stearns trade over the past week or so. Even so- many, many more lost their shirts in Bear Stearns stock over the past few years, most notably the employees, most of whom will be laid off sometime in the near future.

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