facebookIsn't it a guaranteed profit when traders short a stock before ex date and buy back on/after ex date since it is guaranteed that the stock price will fall on ex date? - Seedly

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Isn't it a guaranteed profit when traders short a stock before ex date and buy back on/after ex date since it is guaranteed that the stock price will fall on ex date?

Thoughts on if it's a guaranteed profit?

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Discussion (4)

What are your thoughts?

Chris

Chris

15 Mar 2021

Level 14·Owner and Writer at Tortoisemoney.com

Hi Jerry, interesting question, made me think for a bit and did some research before I figured out why it wouldn't work the way you might expect.

When you short a stock, you're borrowing it from someone else before selling it off in the open market. You look to buy it back later at a lower price for some profit. However, when you borrow these shares across the ex-dividend date, you will be responsible for the dividend that should be paid out to the original shareholder that you borrow those shares from.

This also means that the dividend amount will be deducted to pay the dividend to the shareholder for the shares that you shorted. Assuming a perfect condition, where the share price falls the same amount as the dividend, this would net you a zero profit from the short.

However, of course, there are cases where the share price falls more than the dividend (or less than the dividend), but ultimately, it is not as much of a sure win as you might be expecting. Trade safe, cheers!

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