Purchasing calls prior to a hostile takeover

Jan 23, 2008 0 Replies

Wouldn't it be a good idea for Acquiring Corp. to purchase calls of Distressed Corp. prior to a takeover - hostile or otherwise? This would help Acquiring Corp. to purchase Distressed Corp. at a "discount".



Also, to leverage this transaction, Acquiring Corp. could sell puts of Distressed, since the price will invariably go up. Acquiring Corp. uses thse funds to buy the calls. Moreover, even if prices fell below the strike price of this put options, Acquiring Corp. would simply purchase the stocks of a company that they want to acquire anyways. This is what they wanted anyways.


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