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SELL CFD - News on Rights Issue


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Hi Guys,

I am new to CFD. The intention is to hedge a share holding that you owned. During a rights issue news, usually share will plunge the new day or next instant. Does it make sense to hedge the stock by selling CFD. E.g. a share is priced at $1.10, right after the news comes, i sell CFD at $1.00 and it plunge further to $0.80 or more. Does it make sense to hedge it like this?

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  • 2 weeks later...

You can certainly hedge like that if you are quick off the mark - sometimes the market is surprisingly slow to react. Occasionally it does something counter-intuitive like meme-stock AMC Entertainment did recently when it actually shot up on the news of a proposed rights issue!

But do remember that a 
CFD replicates your position in the underlying so if you shorted the CFD pre-rights and held the position through to the ex-rights date then you would find a short position in the rights added to your account which you would have to buy back at some point in addition to closing your short. Hopefully you weren't thinking there was a structural anomaly whereby someone else would pay for your free lunch every time with no risk to you..

 

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