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+448 Part IV: Additional Considerations 
+The sale of in-the-money calls as a substitute for shorting the acquiring compa­
+ny (XYZ) can be beneficial at certain times. It is necessary to have a plus tick in order 
+to sell stock short. When many arbitrageurs are trying to sell a stock short at the same 
+time, it may be difficult to sell such stock short. Morever, natural owners of XYZ may 
+see the arbitrageurs holding the price down and decide to sell their long stock rather 
+than suffer through a possible decline in the stock's price while the merger is in 
+progress. Additionally, buyers of XYZ will become very timid, lowering their bids for 
+the same reasons. All of this may add up to a situation in which it is very difficult to 
+sell the stock short, even if it can be borrowed. The sale of an in-the-money call can 
+overcome this difficulty. The call should be deeply in-the-money and not be too long­
+term, for the arbitrageur does not want to see XYZ decline below the strike of the 
+call. If that happened, he would no longer be hedged; the other side of the arbitrage 
+- the long LMN stock - would continue to decline, but he would not have any 
+remaining short against the long LMN. 
+LIMITS ON THE MERGER 
+There is another type of merger for stock that is more difficult to arbitrage, but 
+options may prove useful. In some merger situations, the acquiring company (XYZ) 
+promises to give the shareholders of the company being acquired (LMN) an amount 
+of stock equal to a set dollar price. This amount of stock would be paid even if the 
+acquiring company rose or fell moderately in price. If XYZ falls too far, however, it 
+cannot pay out an extraordinarily increased number of shares to LMN shareholders, 
+so XYZ puts a limit on the maximum number of shares that it will pay for each share 
+of LMN stock. Thus, the shareholders ofXYZ are guaranteed that there will be some 
+downside buffer in terms of dilution of their company in case XYZ declines, as is 
+often the case for an acquiring company. However, ifXYZ declines too far, then LMN 
+shareholders will receive less. In return for getting this downside guarantee, XYZ will 
+usually also stipulate that there is a minimum amount of shares that they will pay to 
+LMN shareholders, even if XYZ stock rises tremendously. Thus, if XYZ should rise 
+tremendously in price, then LMN shareholders will do even better than they had 
+anticipated. An example will demonstrate this type of merger accord. 
+Example: Assume that XYZ is at 50 and it intends to acquire LMN for a stated price 
+of $25 per share, as in the previous example. However, instead of merely saying that 
+it will exchange two shares of LMN for one share of XYZ, the company says that it 
+wants the offer to be worth $25 per share to LMN shareholders as long as XYZ is 
+between 45 and 55. Given this information, we can determine the maximum and 
+minimum number of shares that LMN shareholders will receive: The maximum is