454 Part IV: Additional Considerations 
If more than 50% of XYZ should be accepted in the tender offer, then a larger 
profit will result. Also, if XYZ should subsequently trade at a high enough price so 
that the July 50 put has some time value premium, then a larger profit would result 
as well. (The arbitrageur would not exercise the put, but would sell the stock and the 
put separately in that case.) 
Partial tender offers can be quite varied. The type described in the above exam­
ple is called a "two-tier" offer because the tender offer price is substantially different 
from the remaining price. In some partial tenders, the remainder of the stock is slat­
ed for purchase at substantially the same price, perhaps through a cash merger. The 
above strategy would not be applicable in that case, since such an offer would more 
closely resemble the "any and all" offer. In other types of partial tenders, debt secu­
rities of the acquiring company may be issued after the partial cash tender. The net 
price of these debt securities may be different from the tender offer price. If they 
are, the above strategy might work. 
In summary, then, one should look at tender offers carefully. One should be 
careful not to take extraordinary option risk in an "any and all" tender. Conversely, 
one should look to take advantage of any "two-tier" situation in a partial tender offer 
by buying stock and buying puts. 
PROFITABILITY 
Since the potential profits in risk arbitrage situations may be quite large, perhaps 3 
or 4 points per 100 shares, the public can participate in this strategy. Commission 
charges will make the risk arbitrage less profitable for a public customer than it 
would be for an arbitrageur. The profit potential is often large enough, however, to 
make this type of risk arbitrage viable even for the public customer. 
In summary, the risk arbitrageur may be able to use options in his strategy, 
either as a replacement for the actual stock position or as protection for the stock 
position. Although the public cannot normally participate in arbitrage strategies 
because of the small profit potential, risk arbitrages may often offer exceptions. The 
profit potential can be large enough to overcome the commission burden for the 
public customer. 
PAIRS TRADING 
A stock trading strategy that has gained some adherents in recent years is pairs trad­
ing. Simplistically, this strategy involves trading pairs of stocks - one held long, the 
other short. Thus, it is a hedged strategy. The two stocks' price movements are relat­
ed historically. The pairs trader would establish the position when one stock was