One of the more innovative new product offerings in the futures space of late has been binary options. These products allow traders to take a position on possible events by a certain time period. They are valued from 0-100 and expire either at 0 or 100 depending on the outcome. They have been used to take positions on sporting events, political events and economic reports.

They are the basis of the Iowa Electronic market first began in 1988 and used on sports gaming sights but more recently are the basis for contract or proposed contracts on numerous regulated exchanges including Hedgestreet, the US Futures Exchange, the Philadelphia Board of Trade, the Chicago Board of Trade, the Chicago Mercantile Exchange and CBOE Futures Exchange.

Hedgestreet has just introduced a group on contracts based on mergers and acquisitions. Traders can take a position on whether a particular merger will close by a certain date. One of the contracts listed is on the possible merger of NYSE Euronext and the International Securities Exchange (ISE). Russell Andersson, co-founder and vice president of Hedgestreet, when asked if they had any inside information given the announced deal between Deutsche Borse and ISE, said, “We don’t know anything at all but we do think it is a possibility given the current discussion between Deutsche Börse and its shareholders. Hedgestreet is also listing a contract on whether a Deutsche Börse/ISE merger will be consumated.”

It is not even the first contract of its kind as the US Futures Exchange has already launched contracts on who will acquire the CBOT.

Andersson says that that this is a simplified way for retail traders to participate in the merger arbitrage strategy. He points out that they also can participate in what is called “Chinese Merger Arbitrage.” A typical merger arbitrage trade involves buying the stock of a company being acquired and selling the stock of the acquirer. In “Chinese Merger Arbitrage” you do the reverse after that spread has narrowed and you suspect a possible deal will unwind.

As we have learned recently no deal is final until the last “T” is crossed and “I” is dotted, so it may make sense to monitor these contracts.