As a new traders buyouts often look like the best trades ever, they had a massive gap up and they are flagging so tight at highs, you are licking your chops that you can get super heavy on tight risk in an A+ set up. Trust me every new trader who looks for leaders make this mistake once or twice, than after you do it, just like taking that girl out on a $1,000 first date. You never do that shit again because you realize how stupid it is. After finishing “Make Your Bed” (highly recommend and will take you all of 1 hour to read) if that is too much, invest the next 19 minutes of your life watching this video from the author)
Now the reason I mention that because I need to think of a Sugar Cookie punihsment for new traders who fuck up and think they can make stupid money after buy outs get released, if you have any idea’s please let me know! In this lesson we are going to go through a few real world example and we will wrap it up with a dumb money story about buy outs, so let's dive right in at ONCE!
Above is the press release that Roche is buying ONCE for $114.50 a share at a later date. Let's take a look at the ONCE chart.
We can see the day prior ONCE was trading at $52 a share, the news gets announced and it opens at $114.50 and never trades a penny higher. If you were long from the day prior, you caught the easiest trade ever. Trust me once it's announced it's at that price, so forget thinking you will be fast enough to buy $52 and sell $114, if you think that, sir (or ma’am) you are dumb money. Now it is just announced, the deal is not signed, and the longer it takes to finalize the more risk in it closing, hence the sell off that followed.
Key point - if you own a stock that gets bought out and it gaps up huge, take the win you greedy bastard! Let's move onto the next example!
Here we have ABBV wanting to buy AGN for $188 a share.
The company doing the buying gaps down, as they are spending cash to acquire a new company, short term most investors do not like that as the company tends to pay a premium for the company they are buying. There was only 1 time that I ever saw a company gap up from buying another company, very rare, 9/10 times expect the buyer to gap down. Again no free lunch or way to short this before the drop unless you have inside info.
ABBV said they will pay $188 a share, yet only gapped to $168, remember it is the company announcing, it’s all in limbo until the papers are signed, if the DOJ says no then theres no deal. Remember the company getting bought will gap up, as no owner would be stupid enough to sell out for lower than the market price. Now watch that happen a week after you read this!
The hard part for new traders to learn this, is that once the deal is done, you can no longer pull up a chart of the company getting bought, that is why the first time it happens, it's ok, as most simply have not seen it before.
Wait a second didnt you (me writing this) just say a company never gets bought out for lower than the market price?
MDSO was bought out lower than the market price, because the news got out early and people tried to get their free lunch, expecting it to get bought out higher. Yet when the deal was announced, all the people trying to get a free lunch, ended up footing the bill.
Before we unleash the dog shit, a story about the dumbest Doctor I know, let's recap a few things about buyouts:
-The company getting bought gaps up to/around the announced buyout price
-The company doing the buying will gap down
-Unless you have inside information you will never catch the gap up, unless you are randomly in
-You can most certainly catch the gap down, thats easy!
-The only real space that we see buyouts is in the bio and pharma sectors, sure you will see one here and their in other sections however the majority are in the bios. With that being said if you trade bios alot, throughout your career you will probably catch a gap up or two (we caught KITE for a 140% return a few years back)
-Lastly, there is no free lunch, you might catch a buyout and you can also catch some gap downs, and if you catch any phase 3 failures, you will see how the winners and losers tend to even out.
Now let's unleash the dogshit and learn from the dumbest doctor I know! Spero (not the doctor) mentioned he had a buddy who was a doctor and needed some help with his trading. Doctors tend to fall into two categories when it comes to investing:
- They are risk averse as humanly possible (tax free muni bond type guy)
- They are degenerate gamblers
Steven was number 2 a degenerate gambler, now in their profession, they are the smartest in the room, helping a patient beat cancer that is what Steven does all day long and I tip my cap to the man. However in our sandbox, he’s the dumbest trader on the street, anything he owns, I’m shorting, anything he's shorting, I’m buying.
Back on June 17th when the news came out that PFE agreed to buy ARRY, the stock gapped up to $46, you can see from what he sent me it says clear as day they will be buying the company for $48. Dumb money number one, he brags how he called it at $3 years ago, yet his cost basis was in the $20s. No one cares smarty pants.
Dumb money number two, he does not know what to do, shocker. Let's continue to get dumber, shall we?
He says that PFE is paying $48 for the stock, yet talk about a bull, look at the chart, it's going to the moon!
He is holding out! It's going to rip higher! Want to know why? Let's hear why.
He still thinks this stock is going to be around for years and trade higher, yet if he just read the article he sent me, he would know when the deal would be done and he would be holding PFE stock (if he didn't sell).
So he knows all about the company, yet has no clue what the stock is going to do, even thought he already told us PFE was buying them for $48, can you see how stupid this doctor is?
They love to flex how smart they are however ARRY could care less about him being a valedictorian, it's useless info. Now let's see what Zac did who kept it simple!
What took Steve a year of holding ARRY yet he called it at $3 years ago! Zac made it a week by executing a simple gameplan.
Zac bought up through a resistance level, put in a trailing stop, let the stock work and got lucky and caught the gap up, he knew to sell once it was announced and locked in a monster 1 week gain. Simple grand slam week long swing, while Steve is pouring over documents yet he has no clue that a month later ARRY become PFE.
Now here is the kicker, Zac continued to do what we do, make fucking money. Guess what Steven did?
He bought a fucking penny stock! He took his 100%+ gain and dumped it into a $1 penny stock.
What took him years to make was lost in weeks, just like a gambler does!
Do you have balls?
What happens to the company doing the buying?
What happens to the company getting bought?
Is there more upside or downside in a stock after a buyout is announced?
If you get lucky and catch a buyout, what is your game plan?
Post your answers in the group chat!