Dangers of the Greedy Limit Order

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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