Personal Finance & Money Asked on February 18, 2021
Using Tesla as an example who announced a coming 5-1 stock split yesterday
According to the press release, people that own Tesla stocks on or before Aug 21st will receive an additional 4 shares as dividend at the end of the trading day on Aug 28th. Trading will begin on a stock-adjusted basis on Aug 31st.
Due to the difference in dates for when shareholders qualify for additional Tesla stocks and when trading of Tesla on a stock-adjusted basis begins, does this create a scenario where short-sellers between Aug 22nd-Aug 28th (as Aug 29th and 30th are weekends so the stock market is closed) can make a fortune?
To give an example, assuming one Tesla stock is being traded at $1500 on Aug 21st. Since we know that in theory on Aug 31st when trading begins, one Tesla stock would worth $300 due to stock split (though shares outstanding will increase by 5-fold). Therefore, could short-sellers in theory, borrow one share and sell it between Aug 22nd-Aug 28th inclusive at $1500 then buy the one share back on Aug 31st for $300?
From Stock Splits: A Closer Look At Its Effects:
On the surface, a stock split might seem like a stroke of great luck for the short-seller. If you’ve sold 200 XYZ shares at $100 each, you can now acquire them at just $50, right? Unfortunately for short-sellers, it’s not that simple. The brokerage will adjust your order so that you’ll owe twice as many shares. When all is said and done, the stock split doesn’t affect your position one way or the other.
You won't owe one share on Aug 31; you'll owe five shares.
Answered by chepner on February 18, 2021
The split pay date is August 28, and the split execution date is August 31.
On the split execution date, short sellers owe 5 shares instead of 1 share.
could short-sellers in theory, borrow one share and sell it between Aug 22nd-Aug 28th inclusive at $1500 then buy the one share back on Aug 31st for $300?
No. You could short 1 share before the execution date at $1500, but starting on the execution date, you will need to return 5 shares (worth $300 each) to cover your short.
Answered by Flux on February 18, 2021
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