Author: ajalper
Blockbuster’s A shares are currently trading at 2.25-2.75x the value of the B shares. Blockbusters pre-September ratio tracked at roughly 1.1x. Since mid September the ratio has varied wildly from 1.25-2.75. The spread had closed significantly in the last two months. On Tuesday there was a bankruptcy rumor that sent the A shares from over $1.00 down to $.20 in a half hour before the trading was suspended. Both A and B shares experienced high volume during the sell off and the next day during the purchasing of shares. The scare and high volatility had unhinged the correlation between the A and B shares. The A shares are currently trading at about $.45 and the B shares $.17. It is likely that the spread will close significantly towards 1.5x in the next month, once volatility subsides. Because of high selling pressure, the available shorts for the A shares are limited. If you are willing to risk a forced buy-in if shares to borrow run out, this is a high probability pairs arbitrage play. (According to the IB Website, there are currently 700,000 shares available for shorts, 3/6/09). To take advantage of this spread, short A shares and buy long an equivalent dollar value of B shares.
I am short bbi and long bbi.b, and continuing to add to my position.
I was forced out of my short position by my broker yesterday (3/10/09) due to lack of BBI shares to borrow. I am holding on to my unhedged long side for now. I figure there is more upside potential than down, given the continued wide spread. I suppose that hedge funds and brokerages can work out special arrangements to hold their shorts indefinitely or demand the already committed shares when they want them, which leaves us small guys at a disadvantage. I tried replacing them with some of bbi’s in-the-money puts, but the bid/ask spreads are ridiculous. If anyone knows a way of securing shorts during a pairs trade, I would love to hear it.