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Paulo Santos, Think Finance (377 clicks)
Long/short equity, arbitrage, event-driven, research analyst
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This will sound strange, but if you are a courageous trader, you need to start preparing to buy Kodak (EK) - just don't do it yet. You probably saw the press coverage saying Kodak is readying a bankruptcy filing, and you don't want to buy before they go bankrupt!

But you will want to buy it as soon as they do go bankrupt! I mean in the first 30 minutes - 1 hour after they file bankruptcy, actually!

This is where you are probably thinking "why do I read this?" Stay with me for a while, though. There is a reason. There is a phenomenon that strikes well-known, well anticipated, large bankruptcies that had large volume and short interest before they file. This phenomenon simply consists of these stocks going up strongly after taking the initial bankruptcy hit. I've already written on this regarding American Airlines (AMR) in my article "Surprised By AMR Going Up?", but it's never too late to remind people of the approaching opportunity.

Still, after taking this trade I must also remind people of the entire process:

  • Do not overstay your welcome. The post-bankruptcy pop is very common, but the stock will most likely be worth zero over the long-term;
  • Do not buy the bankrupt stock unless you do it very early (first hour) in the bankruptcy, with a view towards taking short-term profits;
  • If you have already bought EK before the bankruptcy, don't panic in the first hours of the bankruptcy, but don't get filled with hope either, use the post-bankruptcy to get rid of the stock (in the first few days).

Conclusion

We have a very rare, quite profitable, very risky, counter-intuitive trade coming up on Kodak. Be ready to take advantage of it, as the window of opportunity will be very narrow, and do read the AMR article to get a bit more detail on how the strategy goes.

While this and similar trades, might be short-term in nature, they can be part of a long-term strategy. By taking every chance of this nature that comes around with a small part of a diversified portfolio, and given the positive expectation of these trades, the portfolio will benefit greatly, much like it can benefit from otherwise short-term strategies like selling covered calls.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in EK over the next 72 hours. This won't be a long-term position if I do buy. I will only buy on a bankruptcy filing. Be sure to fully understand the strategy I am talking about here, as it's very unconventional.

Source: Prepare To Buy Kodak