This newsletter posts small, low-risk arbitrage opportunities involving reverse stock splits. I send them as soon as they are posted, but most of the time this ends up being around 1:30pm on the day of the split. Trades must be executed by market close that day, e.g. 4pm ET (or later if you can trade aftermarket hours). Opportunities are irregular and small, averaging about 3 per month and $4.50 per trade in 2019. They are also low-risk—the vast majority involve an investment of less than $1.
To have opportunities delivered directly to your inbox, please subscribe to this newsletter. Opportunities will also be posted to Twitter @ReverseSplitArb. Updated details about the latest reverse splits are also posted on the website. The rest of this article answers frequently asked questions.
What’s a reverse split? Say a company needs to increase share price, often to stay listed on an exchange. To do this, they announce that 10 shares will now be consolidated into 1 share, which has the effect of increasing the price per share about 10x. (The exact ratio may differ.) So if you had 10 shares before the split, you'd now have 1 share that's worth ten times as much. That's a reverse split.
How do I profit off this? But what if you only had 1 share to begin with? Now you'd have 1/10 of a share, a fraction which historically could not be traded. To get around fractional shares, companies will sometimes pay you the cash value of the fractional share. Other times, though, they will round you up to one full share. When they round up, the share you had bought for $0.50 is now worth around $5. You profit $4.50 with almost no risk.
Can I buy more than one share to make more money? No. This strategy does not scale, otherwise it would have been shut down. If you buy two shares for $1 total, you still only get one full share worth $5 after the split, with a profit of only $4. Never buy more than one share.
Will this work with any broker? No. Some brokers do not participate in round ups per their policies. An updated list of brokers that do reverse split round ups, as well as a list of those that do not, can be found here.
How do you find these opportunities? This has always been the hardest part. There are a few lists online, but they don't specify which are tradeable on Robinhood, and even then you still have to dig through press releases or SEC filings to figure out which ones round up and which ones pay out cash. That’s where this newsletter comes in—I do the research for you.
Why should I subscribe? If there's a tradeable reverse split that day, you will receive an email around 2pm ET (sooner if I can). In the email, I’ll say what stock I’m buying, on what platform, how many shares (almost always 1 share), and when the reverse split will occur. Feel free to follow my trades, but again, this is not investment advice. I sell shortly after the full share is deposited in my account, but feel free to hold if you prefer.
How often do these come up? Tradeable reverse splits with roundups are irregular. In 2019, though, I averaged 3 per month, with an average profit of $4.50 per trade or $14 per month.
What are the risks? The initial investment is quite small, so risks are low. In 2019, for example, I invested a total of $14 spread over 37 reverse splits. The main risk is losing your initial investment in each trade. Companies might stop rounding up fractional shares and switch to cash payouts. A broker might refuse to round up, or a broker that had previously executed round ups might change policies and stop. As many brokers now offer fractional shares, brokers could simply deposit the equivalent fractional share rather than round up.
Too much reading, is there a video?
Although I was not involved, Financial Beanstalk (@FeeFiFoFreedom) provides a great explanation in this video.