I'll tell you what. I'll just explain my views on the whole situation, and then maybe we won't have to go back and forth.
1) I like TLAB (one of my favorites)
2) I like CIEN (another favorite)
3) I think that more than likely the merger will go through without any renegotiations occurring.
My first instinct was to short TLAB when it rallied back to 61 on Friday, because usually when a stock like that plummets and bounces back it retests the lows and shakes out a few buyers that bought on the first wave of selling. Second of all, there are always people that refuse to sell on the first wave of selling. (Me included). They always wait for a rally to sell into. When TLAB went to the high 50's and then rallied back to 61 I figured those guys that like to sell on the rally were going to do just that, so I shorted. It worked out well, I got my 1 1/16 point gain in a few minutes.
A little while later I remarked to this thread that the spread betwen CIEN and TLAB was pretty wide. It was at least 5 points, sometimes widening to 5 1/2 or more. (Both stocks were moving extremely fast) I entertained the notion of doing an arbitrage play. If the deal closes as expected, the spread will be gone and you will make up the difference. (It doesn't matter, where TLAB/CIEN go, up or down, just as long as the price gap eventually closes). The deal is set to be completed next week, so if everything goes smoothly, you will make your 5 points rather quickly.
Now, I did short TLAB a second time with a limit at 60. My intention was to do an arb play and go long CIEN as well, but I hit a few snags. I had a limit order to sell 1000 LU at 87 3/8 and only 300 shares filled, leaving me with 700 unsold. I didn't have enough buying power in that account to carry the 700 shares of LU and have open orders for TLAB and CIEN all at once. (If I wanted to do 1k each of TLAB/CIEN. Obviously I could do less, such as 500). So what happened was my order for TLAB was rejected, and I cancelled the other order for CIEN, because I didn't want just one side of the trade open.
A little later on I decided to put in an order to short 1k of TLAB at 60 (it filled), with the intention of buying the CIEN for the arb play after I sold the other 700 LU and freed up some cash. There was a very distinct reason why I decided to short TLAB first, with the intention of buying CIEN later, as opposed to buying CIEN first and shorting TLAB later.
1) I was still long 700 shares of LU, (which began to fall along with the market) so buying the CIEN first without shorting the TLAB would give me too much exposure to the long side. I would rather have the hedge of being short TLAB while long LU.
2) I figured there was a good chance that CIEN and TLAB might drift lower, so I could lock in the TLAB short at 60 and pick up the CIEN long at a lower price later, getting an even larger spread. This is purely a funtion of my greed, I thought I could time the market well enough to get a good wide spread. A normal arbitrageur would just decide when the spread was large enough for his taste and then put market orders to go long CIEN and short TLAB at the same time. My way would have worked out quite well if I had enough money to buy 1k of CIEN. You see, my TLAB short did fill at 60. CIEN closed at 54 1/8, so I could have gone long at the close for a 5 7/8 point spread between my long and short. Furthermore, I think if you picked a good time to buy CIEN, (when it was extremely weak), a spread well over 6 could easily have been had.
Look at this intra-day chart of CIEN. Notice how it hit it's low around 51 1/4 in the last hour of trading, so if your timing was good you could have gotten over 8 points betwen a short of TLAB at 60 and a long CIEN below 52.
quote.yahoo.com
Had I put market orders in on both I would have only gotten maybe a 5 1/4 point spread.
3) There are other interesting dynamics that need to be taken into account as well. Let's say I put market orders in to short 1k TLAB and long 1k CIEN. Let's say for some reason there were no shares to be borrowed or there wasn't an uptick on TLAB, so my CIEN market order filled but I didn't get my hands on the TLAB short. Then I am exposed to CIEN on the long side, without any TLAB short to hedge myself. If CIEN keeps falling while I am trying to get a TLAB short on, I will be losing money.
That is why I was interested in being short TLAB first. If you notice the closing price of TLAB and CIEN, they closed with only a 4 point spread betwen them, so my plan would be working for the time being. You would be up anywhere between 1-2 points already and you could have closed out your position before the weekend, or kept it with the hope of making even more next week. You could cover the TLAB short at 58 1/8 for a 1 7/8 gain, and then just leave the CIEN long if you think that CIEN was due for a rebound. You could've dumped the CIEN long if you thought the market was going to tank on Monday, and you would be short TLAB now at 60, with a 1 7/8 point cushion.
As it ends up, I have no position in TLAB (covered at 59 15/16) or CIEN, and ended up being long more LU. My inclination now is to buy CIEN and wait for it to convert 1 for 1 to TLAB within a week. I think TLAB/CIEN in the low 50's is a good value. If the merger doesn't go through and CIEN has to trade on it's own merits, I wouldn't mind owning it in the low 50's as well.
Hope that clears everything up for you.
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