Have you ever seen a stock suddenly spike and think, “Wow, this looks like a good thing to day trade once the price comes back down?”
You think you see a repeatable and reliable pattern that will soon provide you with a good trading setup.
Sometimes, you’re right…And if you’re right, you can use one of my many trading strategies: “Dip and Rip,” VWAP hold, Oracle signal, etc.
But sometimes you can be very wrong.
Take a look at yesterday’s stock chart for Spar Group Inc. (NASDAQ: SGRP).
SGRP 5-Day, 5-Minute Candles Chart; SteadyTrade
It looks pretty exciting, doesn’t it?
I brought up this example during my Premarket Prep webinar yesterday because I wanted to stress that this is a trade you should AVOID.
By the way, every morning at 8:30 am Eastern, during my live Premarket Prep, I share tons of advice I’ve gained over my 25+ years of trading experience…
And I do the same during my live Daily Double Down webinar at 12 pm Eastern…
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Actually, I knew right away that SGRP was not tradeable as soon as I saw the chart.
So why is SGRP not tradeable?
Because it’s a buyout, and I knew because buyouts have the following tell-tale signs:
A Sharp, Immediate Price Jump: When a buyout is announced, the stock usually experiences a sharp and immediate price jump—often 20% or more—depending on the premium offered over the current market price.
Unlike a gradual climb you’d see in a momentum play, this spike is often a one-and-done event, with the stock price settling near the buyout offer level.
Case in point: SGRP spiked up 64% within five minutes.
A Volume Surge: Alongside the price spike, you’ll see a massive surge in volume.
But here’s the problem: this volume doesn’t continue to build like it would in a stock running on news or earnings. Instead, it spikes dramatically and then stabilizes. This is because, once the buyout news is public, most of the big moves are already baked in.
Again, SGRP’s volume went from nothing to over 700k shares almost instantly and then immediately fell off.
The Price Stabilizes Near the Offer Price: After the initial spike, if the stock price quickly stabilizes and hovers around a specific level, that’s a great sign it’s a buyout.
Remember, the market is efficient. Once the buyout price is known, the stock usually trades around that level, with little room for further upside.
Another box checked…SGRP’s price did precisely that after the spike.
After my first glance at the chart, I could confirm my thoughts by checking the news.
And sure enough, here’s what I found with a simple search…
And if you’re still not sure…
There is a Lack of Ongoing Catalysts: In many cases, a buyout spike isn’t followed by the same hype or ongoing catalysts that drive other types of stock movements.
If you’re not seeing additional news, updates, or chatter about potential further developments, you’re probably looking at a buyout situation.
Speaking of news, much of it, particularly for small companies like penny stocks, goes unnoticed.
For day traders finding the information they need to make informed trading decisions can be a small nightmare.
If scanning every financial news source daily is your cup of tea, more power to you!
But if you’d prefer someone else do the heavy lifting for you, check out our proprietary financial news service, Breaking News Chat (BNC).
BNC is a financial news chatroom led by veteran Wall Street traders, each with over 20 years of experience. They get you the information you need before anyone else so you can trade on the events that matter.
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Table of Contents
Why Trading Stock Buyouts Isn’t Worth Your Time
In the stock market, catching a big buyout might seem like a dream come true. A company announces it’s being acquired, and suddenly, the stock price rockets.
But here’s the reality: trading stock buyouts isn’t as glamorous or as profitable as it might seem, especially for those of us who prefer high-probability setups with a strong risk to reward ratio.
The Illusion of Big Gains
When a buyout is announced, you’ll often see the stock price spike close to the acquisition price. That might look like an opportunity to jump in and ride the wave higher, but the truth is, most of the juice has already been squeezed out of that trade.
The market is smarter than us…
Once the news is public, the stock price typically adjusts almost immediately. You won’t find some secret way to make money that no one else has already figured out.
And your potential upside is limited because the stock will usually hover around the buyout price until the deal closes.
That means your chance for big gains? Practically zero.
Limited Profit, Big Risk
Even if you’re considering buying in after the announcement, hoping the deal might get sweetened or that another bidder will jump in, you’re still facing serious risks. The profit potential is minimal because the stock price rarely moves much beyond the initial offer price.
And the downside risk? That’s where things really get dicey. If the deal falls apart for any reason—regulatory problems, financing issues, or the acquiring company changes its mind—you’ll be left holding the bag.
Don’t be a bag holder!
The Waiting Game
Buyouts can take months or even longer to close. During that time, your capital is tied up in a stock that’s probably moving nowhere.
You want your money to work for you, not sit idle. By locking your funds in a buyout stock, you’re missing out on countless other opportunities to make higher returns with lower potential risk.
This was the headline for Kellanova Co. (NYSE: K) on August 14th.
And as no surprise to me, here’s how K’s stock has done since the announcement.
K 1-Month, 1-Hour Candles Chart; SteadyTrade
Pretty ugly…
There Are Better Opportunities Elsewhere
As traders, we aim to find the best opportunities to maximize our returns while minimizing our risks. Buyouts simply don’t fit the bill.
Instead of chasing these low-potential, high-risk trades, why not focus on setups with a proven track record? Earnings winners, low floaters that are running on volume and momentum, stocks poised for a short squeeze…the list goes on and on.
Join our StockstoTrade community to learn about these strategies and others. We discuss all of these ideas every day in our free, live webinars.
My Final Thoughts
While that spiking stock might be a pretty chart, at first, don’t buy into the buyout!
Limited upside, high risk, and the potential for a lot of wasted time make trading buyouts pretty much a losing proposition. Remember, in trading, it’s not about being in every trade—it’s about being in the right trades.
Have a great day, everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade
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