Spread Trading and Takeovers

This morning I came in short TLEO (Taleo) at about $39.50 as part of a spread I initiated yesterday.  Oracle announced this morning that it was buying TLEO for $46 per share.  Bad news!  So how do you prevent something like this from happening?  The short answer is you can’t.  But there are a couple of things you should be doing to lessen the pain and decrease the frequency of such events.  First you should create a diversified portfolio that can withstand such a move.  TLEO represented less than 2% of the portfolio.  Second, you should be certain that your process is not getting you into situations like this on a regular basis.  If it is, you might want to re-think your strategy.  In our case it hasn’t.  Sometimes we’ve been on the winning side of these events.  If your process is sound and your portfolio is diverse, events like this will occasionally occur, but they shouldn’t prevent you from being profitable over the long run.

Written by Norm Winer.  Follow me on Twitter and StockTwits.