Dutch Aution Buy back heuristics
  1. Never tender more shares than trade in 1 day. If you get stuck with stock, shorting into the position is very hard when you have more than one days' average daily volume.
  2. Never tender shares in a company unless you want to own some after the auction or unless you are hedged. Being stuck with a long term investment for a company that you were playing for the auction will distract you from the next deal.
  3. Use priority odd lot rules.
  4. When the stock rises to within 99% of the top of the dutch auction, strongly consider selling. For example:
    if (S/Sm > 0.99) SELL. Use a limit order or a trade trigger for this. S = stock price, Sm = max on the dutch auction. There is ALWAYS downside risk.
  5. Naked Call Write: When the termination date of the dutch auction is a day or two before the xdate of the call (like SMG); 5 minutes before the close on the termination date check to see if the stock price will reach the strike price of the call. If it looks like it wont, write the call if the premium that you get exceeds the amount that you can loose. The basic idea is that a day later, after the results are announced, the dutch auction will be over-subscribed and the chance that the company will lower the buy-back price increases. Check the bid on the call the following day (if there is no bid, you win!). If the bid is lower than you paid, consider unwinding the position.
  6. In a bear market, dutch auctions tend to be under-subscribed. See, for example, the NCC dutch auction on 3/1/07.
  7. In a bull market, dutch auctions tend to be over-subscribed. See, for example, the SPOR dutch auction, 01/01/07.
  8. With large positions (i.e., >10% of trading account) it is easy to loose objectivity. Keep it small!
  9. Capitulation is a bullish signal! On the termination day, a stock experiencing a strong down movement on heavy volume is being driven by risk arbitrageurs. This is capitulation.
  10. Sanity wins; buy into the down market.
  11. on big positions hedge with puts and tender shares into auction.
  12. If stock at or below min in auction that is very bullish.
  13. puts need at least 1 week of time after auction.
  14. Always check % of float in BBK (30% is bullish, 3% is not).
  15. Market action has little to do with auction results.
  16. Do not be too early. Always wait for the details.