Initial trade date: 2009-07-28
Bought: X shares of CYCL @ $7.36
Sold short: 0.28X shares of T @ $25.71
Closing date: 2009-10-19
Sold: CYCL @ $8.41
Covered: T @ $25.81
Total return: 13.8% (in less than 3 months).
Annualized return: approx. 56%
Note that X is irrelevant here. As long as the total dollar amount used for shorting was also used on the long position, this was a hedged transaction. The risk was the arbitration risk -- i.e. that the deal wouldn't close. Since the offer price was to buy CYCL for $8.50 per share, today's price tag of $8.40 was good enough for me.
Note also that I lost a bit on the short side, but as long as the prices converged to the appropriate ratio, the end result would have been beneficial, which it was.
When I mention these short-term opportunities, I can't help but feel a bit like a trader, or a short-term speculator. However, there's a big difference between an arbitrage position versus a speculatory market-timing trade -- the latter of which I do not engage in. Arbitrage is one of two short-term transactions I find suitable for an intelligent investor to attempt in the stock market. The other one being smart option investing, which I'm still to discuss here.
Disclosures: No more positions in the above mentioned securities.