ArbitrOption’s approach uses exchange-listed options to make highly focused investments predicated on the success or failure of a pending event with a binary outcome.
We seek to take on acceptable risks and use options to ensure that we are better compensated for those risks than other investors who trade the underlying equity. In short, our approach provides access to the same investment opportunities at a more attractive price.
There are three key contributors to ArbitrOption’s historical outperformance:
ArbitrOption’s approach to event-driven investing is opportunistic, constructing a portfolio from individual components, trade-by-trade, in response to market conditions.
Corporate events can take many forms. Broadly, ArbitrOption specializes in merger and acquisition transactions, regulatory decisions, litigation outcomes, restructuring opportunities, corporate spin-offs and split-ups, shareholder agitation, and proxy contests.
The common element of all of these opportunities is an underlying event significant enough to create trading imbalances or fundamental uncertainty in the securities of the corporation experiencing the event. Our flexible approach results in an all-season approach to investing, where the strategy relies not on the cycle in any particular sector but rather on the ever-present existence of corporate change.
The ArbitrOption strategy employs a trading tactic that is particularly suited to events that create value. The strategy combines expertise in assessing an event’s probable timeframe and terminal value with proficiency in trading listed call and put options.
This approach results in enhanced returns and more accurate risk estimates.
ArbitrOption adds value by applying its process of exhaustive research and, if appropriate, its trading tactic, to events known to the investment community at large.
We are investors, not speculators, which means that we invest in value-creating events that have been publicly announced, taking advantage of the legal obligations that come with disclosure.
Event-driven investing is a strategy that relies primarily on information. ArbitrOption’s process is extremely research-intensive, gathering all information available while also taking into account the quality of that information. This investment analysis process focuses on a range of exogenous risks, including regulatory, legal, corporate, and capital market factors.
Only after the implications of an event are understood will ArbitrOption begin evaluating the applicability of its trading tactic. This rigorous approach ensures that investment risks are understood before any assets are invested.
The highest risk in an event-driven strategy is that the event will not occur. This reality is the cornerstone of ArbitrOption’s risk management approach.
Professional investors use sophisticated techniques to estimate the size of the loss they would experience if an event process is undone. Unfortunately, these risk estimates are frequently inaccurate, leading to losses in excess of the expected level. One of the key benefits of the ArbitrOption trading tactic is that risk is better-quantified and, in some cases, reduced, relative to the traditional approach to event-driven investing.
In addition to the high quality of ArbitrOption’s value-at-risk estimates, we address risk by monitoring individual positions as well as sector and overall market exposure. All of ArbitrOption’s positions are hedged and stop-loss levels are established at the time of position initiation.