The GME stock dividend has doesn’t negatively impact short sellers via /r/wallstreetbets #stocks #wallstreetbets #investing

The GME stock dividend has doesn’t negatively impact short sellers

Credit /u/zoamet

This is a counter of the “god tier dd” from the duperdonk subreddit PHD, finance major, investment analyst dd writers.

Consider the following scenario: you’re shorting GME pre-split at $100. That means that you borrow a share and sell it to somebody for $100. At this point GME announces a 10:1 share dividend, meaning that for every share that you own you get 9 additional ones as dividend. Since the market cap should remain mostly the same, that should set the price of individual shares to roughly $10.

The people who bought your shorted share get the 9 additional shares through the dividend, all good on that side. The people you loaned the share from ask that you pay them the 9 share dividend. Of course, you haven’t received the dividend since you’ve sold the share short, so at this point you’re screwed and you have to declare bankru…

Oh no wait, you just borrow 9 other shares and use them to pay the dividend. That means that you’re now short 10 shares which is neutral since there was a 10:1 split. That was a close one.

Alternatively you can decide to buy 9 shares on the market, which should cost you about $90 at the new price, meaning that you end up with $10 and one short share left, effectively meaning that you’ve covered 90% of your position, but you didn’t gain or lose anything.

It’s not like a cash dividend which increases the total value of the stock + dividend and creates a demand for additional funds by shorts. Share dividends are zero-sum.

Now it’s of course possible that, due to various reasons, the market cap could increase post-split, in which case it would be bad for the shorts. In my scenario above it would happen if after the 10:1 split the shares ended up trading at, say, $11 instead of $10. But that’s no different than any other increase in stock price.

Submitted April 01, 2022 at 08:57PM by imdoubleliftfanboy
via reddit