…by Anura Guruge
So, AOL today provided an object lesson in what happens to a stock’s share price on the ex-dividend day. To be honest, I wasn’t sure what would happen in the case of special dividends, as opposed to regular dividends. Well it appears that the stock price WILL go down with special dividends too.
So that begs the question: how can you exploit that drop? An obvious answer would be to sell the stock short ahead of the ex-div and then settle up the ‘short’ after the dividend is paid. Yes, it sounds too good to be true — and it is exactly that. I called up Fidelity and asked. I was amused that the initial rep. that I spoke to was not sure of the answer. He had to check with the ‘back room’. The answer is that it does not work. Yes, the principles of selling short will apply. Yes, you can settle the ‘short’ at the ex-div price, BUT here is the catch. You OWE the dividend to the ‘firm’, because you were just borrowing the stock. So, the ‘short’ based purely on the price drop due to the dividend will not work. Just wanted to share that with you, in case you too were thinking of it.