saw shares that were priced at $15 jump to 15.94 a 6.3% increase.
The common was at 16.28 at close Friday. My guess is they bought the equivalent and shorted the common for a guaranteed price difference. However, this is probably the easist arbitrage play I have ever seen which to me means the demand for the equivalent, as evidenced in its uptick from 15 to 15.94 (6.3% at offering) will increase until the gap between common and equivalents is closed completely making the arb play non-existant.
I know they closed Friday at 15.94, but I don't know where they closed today. That tells me that they shorted the common right down to the equivalent value, fully closing the gap and giving whoever got the exact price difference top to bottom an easy profit.
I do not see how this can continue for 105 trading days, as any hedge fund or money manager with a brain knew this was an easy trade. I would have to think this was a one day event. I would expect short covering of the common to close out the arbitrage play. However, as i said I can't be certain as I don't know where the equivalents that were priced at 15.94 closed today.
Interesting that the common closed right near the Friday closing price of the equivalents. Tells me those hedgies jumped on this train as quickly as they could. Like I said, this was the easiest profit of the year if you had the money to make it. We didn't of course, as we can't purchase the equivalents.
This said, for hte next 105 days any time there is a divergance between the common and the equivalents where the equivalents are lower than the common you can be assured they will short the common until the equivalents and common are of equal value. My guess is, that divergence from Friday was almost completely closed today and the equivalents are now priced somewhere aroudn 15.8-15.9; right around where the common is
hmm...maybe trying to hard....
the original rationale for shorting the box was to delay/defer tax on gains, that loophole was closed down.
mow, the shorting the box transaction is no different than any other short transaction from a tax liability point of view. (just as if you opened a short and borrowed from your broker). so, the tax liability is completely dependent upon realized gain/loss on that specific position, and the timeframe you held the position.
gosh collaborate and vincent, i dont know here. the tax reform act of 1997 scetion 1259 deals with short sales, i think its taxable based upon that. unless another tax reform changed it. dont know for sure,
Yes, but he reason that does not have the same impact in this arb is because they are trading under two ticker symbols. The equivalents have not been made in to common, so they are not shorting their same position.
This is what I would ASSUME happened. The offering was 15, many bought and the demand was high which pushed the close Friday of the equivalents to 15.94. Friday the common closed at 16.28. They shorted BAC and bought the BAC PrS equivalents on the NYSE hoping to scalp the arb difference.
It was the easiest arb play I have ever seen. The equivalents, when approved, will be transitioned one for one to BAC shares. However, they are their own equity until that transition takes place. So the demand for the equivalent was high because if I could buy the equivalent at 15 when the common is valued at 16.24 that guarantees a 1.24 profit. However, it appears the funds knew this which elevated the equivalents from 15 to 15.94 close. And it explains why we saw the downtick in the common to that level.
In regard to the box, I guess if they owned the common in their regular float before this then some limitations would apply, but if the funds who purchased the equivalents did not own the stock then this arb play was very simple.
Other who owned the common float already and purchased in to the equiv offering, would play the puts, but I don't see much action in those.
The risk for someone who would hold this arb play would be if somehow the offering is refused by shareholders or if by some magical chance the equivalents are priced higher than the common on the day of transition.
originally, you could short the box is zero out cap gains issues and defer tax liabilities. Now, each side of the trade is considered independent, and is viewed as loss/gain based on the individual trade open/close. The IRS closed the deffered tax loophole only, so the two trades cannot offset each other.
In theory, if you open a long position in xyz at 10.00, and then open a short boxed position at 15.00, and then close the short position at 11.00, you have a 4.00 gain on the closed short position. If you keep the long position open, then it rides forward. If you closed both positions at 11.00, you would have a 5.00 gain. Both would be taxed at either short term or long term depending on how long you held the theoritical positions open.
But, that's not what "pro's" use shorting their boxes for anymore...different subject I know...
not sure of i helped or not..take care...
i know what it means, but when one does it, retail level, the tax impact is locked in at that time. if i were long at a cost of 20...shorted at 25...then i locked my taxable gain at 5 per share, regardless.
Most interesting (and smart) post I read on this board in a long time. This, in fact, will put pressure on the stockholders to approve the conversion as soon as possible as the dilution has in fact tken place. Two ways this game could be countered: the company reinstates the divident as soon as possible or the SEC reinstate the ban on shorting financials for a period of time. Ghassan.
And don't forget the dividend they get on the preferred.
Yeah this is easy money for the people who go in on the offering. They were probably shorting like crazy when it spiked up on Thursday.
And don't anybody think that there will be any kind of squeeze from this, either. The shares are already purchased, they just have to wait for the conversion.