Trade a Rights Offering Like a Warrant Expiration

Often a rights offering can be traded in the same way you would trade a warrant expiration. As long as the rights are publicly traded, arbitrage between the common and the rights will result in downward pressure on the common stock. While there is usually little profit for the average investor in the arbitrage, you can take a position in the common around the time of the rights offering expiration.

Just as a common stock with an expiring warrant often moves up the day of or day after expiration, a stock with a rights offering often does the same. The key is to monitor the stock and enter your position in the days surrounding the end of the rights offering. Entering too early usually results in a loss as the stock trades down close to the rights offering strike price.

Since there are a limited number of warrants trading on exchanges, and even fewer expiring on a regular basis, rights offerings give a trader seeking this type of opportunity more chances to make money. You can apply the same principles used in determining whether a rights offering is a good trade as you do when buying common stock near a warrant expiration.

Some investors have asked if a secondary offering can be traded the same way. While secondary offerings do usually pressure the underlying stock, there is a difference that makes a secondary offering less appealing.

In a secondary offering the offering often is announced and placed the same day. This prevents the arbitrage that takes place with a rights offering or warrant expiration. While a common stock may move up after a secondary offering, it is not from the same supply and demand factors that come into play in an arbitrage situation.