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  • Writer's pictureIshfaaq Peerally


I recently started investing in Caesars Entertainment $CZR as part of an arbitrage play and I've got so many questions regarding arbitrage. Arbitrage happens whenever there is a spread between the price of any security. For example, if a stock is traded both in London and New York and the price in London is $98/share while in New York, it is $100/share (taking into consideration all foreign exchanges, fees, taxes and commissions), you can buy the shares in London and Sell in New York. This is not for most people as there are big hedge funds with supercomputers looking for such deals. George Soros is known for doing such types of arbitrage. Another example of risk-free arbitrage is buying physical oil right now, store it on some tankers and then sell it a year from now at a profit. This is possible because of the oil contango but not available to most retail investors. One risk-free arbitrage deal that you can do is store Nickels, $0.05 coins. Since the government will likely lower the concentration of Nickel in those, you can most likely sell them to collectors in the future for a higher price. Hedge fund manager Kyle Bass is doing such a trade. The type of arbitrage that I do is called merger arbitrage or risk arbitrage. For example, Google is buying Fitbit for $7.35/share in cash. The shares of Fitbit are lower today, you can buy shares of Fitbit and wait for the acquisition to take place and take your profit. The only risk is that the deal doesn't go through. Another type of arbitrage is stock-cash merger where one company buys another one in cash and stock. For example, Eldorado Resorts is buying Caesars Entertainment. In these types of arbitrage, if the shares of the acquirer goes up, you can make bigger profits than the current spread. Warren Buffett has been doing a lot of merger arbitrage, for example, with Red Hat and Monsanto lately when they were acquired by IBM and Bayer respectively. Warren Buffett used to do a lot of arbitrage when he was running his partnership and he used to call them workouts. Before doing arbitrage, you need to understand both companies and the deal. You need to make sure that the deal has a high probability of going through. There are regulators that are involved and may stop a deal. Why do arbitrage? Stocks of companies that are going to be acquired are usually less volatile than other stocks. Instead of keeping cash, arbitrage is a good alternative. Watch the full video on YouTube and Subscribe: Here's a full analysis of the arbitrage trade between Caesars Entertainment and Eldorado Resorts: Join my private investing group on Facebook for more:

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