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Tesla stock splits this week. That could mean another wild week of trading.
Tesla (ticker: TSLA) shareholders of record on August 21 will receive a dividend of four additional shares of common stock, which will be distributed after the close of trading on August 28. It amounts to a 5-for-1 stock split.
The record date is important, but there is no arbitrage for investors to exploit. If someone sells Tesla stock after August 21 and August 28, they sell the stock dividend as well. It all works out in the pipes of the system of trade and reconciliation.
Shares have been up more than 50% since the split announcement on August 11 – that’s right, more than 50%. Research on stock distributions often shows that stocks can get a bump around a split announcement, but the recent rise is still a lot.
That makes it predictable what everyone is judging this week. Investors may want to get into the stock before the split takes effect, believing that investors will buy Tesla stock on August 31, which is when the stocks start trading on a split-adjusted basis. On the other hand, it is difficult to justify a 50% increase in value precisely because the absolute value of each share price is lower.
Maybe all the good news is already reflected in the stock price, and stocks will fall after the split becomes effective. And do not forget that many brokers already offer fractional shares: Investors can own a piece of Tesla for as little as $ 5.
While fractional share ownership is already a thing, a split can have one fundamental impact: trading options. A call from Tesla in September, for example, with a strike price of $ 2,080, for example, will cost about $ 180 to buy on Friday. An option contract is for 100 shares, so it costs $ 18,000 to buy one contract. The price of the option will decrease as the absolute share price decreases.
It will be cheaper – on an absolute basis – to trade Tesla stock options. But that’s not much reason for stocks to rise, or fall, on a split announcement.
Tesla shares have now risen about 400% year-over-year and more than 800% in the past year, comparing returns of the Dow Jones Industrial Average and S&P 500 as automotive peers. It was down 0.8% on Monday at 12:45 p.m.
It has been an incredible run that was almost unpredictable. Calling the stock this week will not be easier.
Write to Al Root at [email protected]
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