Dangers of the Greedy Limit Order

Tuesday, October 14th, 2008 | Mergers, Special Situations with 9 Comments

As some of you might know, I’ve been playing the Constellation Energy Group (CEG) merger arbitrage opportunity. Berkshire Hathaway’s MidAmerican has offered to buy CEG shares for $26.50. The stock has bounced down as low as $15 and as high as $28.62.

I sold my original position in CEG, but last Friday I couldn’t resist buying CEG at $22.30. After I bought the position, I decided to put a good-until-canceled (GTC) limit order in at $26.30. How did I come up with $26.30? I figured it was less greedy than my last limit order sale of CEG at $26.40.

This morning, the market roared back to life. Constellation shares jumped up to $26.26 while I was away from a computer. By just 4 cents, I missed profiting from CEG again in a very short period of time. Was it worth holding out for 4 more cents given the risk of having to wait a while for MidAmerican to close the deal, which is still quite a ways off? What limit price should I have placed? What criteria do you use to determine what price to sell a merger arbitrage opportunity early?

Disclosure: I own shares of CEG. No other shares mentioned in this article are owned at the time of this was posted.

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Comments

  • That gets into trading. I’ve been learning about trading and technical analysis lately. Looking at the chart going back until late Sept it traded around 25-26. after that great run on the 10th it hit 25.61 couldn’t break it again in the morning as it only hit 25.59 from my chart software. No one can take it above high 25s for long then. funny though it was in the 26s on the 8th. I probably would have sold it for 25 on that big run Friday or 25 monday as the traders seemed to like it there.

    Mark Perkins October 14th, 2008 at 10:26 pm
  • Hi Mark,
    It’s true that this discussion could get into trading. However, I was thinking more along the lines of optimal bet. What price is it worth getting today versus having to wait several months to get the full cashout value of 26.50? I don’t really consider the previous question a technical analysis/trading question, but maybe I’m wrong. I’m just thinking about how to best optimize my risk return ratio.

    George October 15th, 2008 at 8:26 am
  • I just picked up some CEG @ 23 ( 1/4 position). Let’s see if it goes lower.

    The large drop today is due to the fact that EDF is withdrawing its intention to buy CEG.. I guess the market thinks that MidAmerican will lower its bid as well..

    http://www.euronext.com/news/companypressrelease/companypressrelease.jsp?lan=NL&docid=595639&cha=1721

    Dividend Growth Investor October 15th, 2008 at 1:13 pm
  • I’ve lost count of how many times I’ve missed a stock on either the buy or sell side of a LO. I have this weird notion that if you stick with something for a while the market tends to come to you if you’re being reasonable with your target price for buy or sell.

    Nurseb911 October 15th, 2008 at 7:28 pm
  • And sold @ 23.98..

    Limit orders do work out for some people. But sometimes it is better to watch the market in real time and act..

    Dividend Growth Investor October 16th, 2008 at 9:09 am
  • When I buy, I try not to enter round numbers whether it be to the nearest dollar or 10 cents. Making the limit order a few cents lower generally works for me.

    Jae Jun October 18th, 2008 at 1:53 pm

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