Why not short on a demerger?

[Tyler Durden]

So I witnessed my first live demerger today, as the share price of Tabcorp fell sharply since it's spinoff Echo was first listed today.

I remember checking the Foster's chart and they took a hit upon demerging as well - so what is to stop people from making easy money by short selling these shares on the date of the demerger??

I'm sure there's a reason to it, otherwise everyone would be doing it.

 

[Huskar]

I know that the ASX makes option adjustments on corporate events that affects shares underlying options in a specific way. Whether any adjustments are made depends mostly on whether it is a pro rata event (ie affects all underlying shares equally).

See View attachment explanatory_note_option_adjustments.pdf. Find it by searching for "option adjustments" on ASX website.

The only real exception to option adjustment is dividend announcements.

So if you had tried to short TAH by buying put options prior to the demerger but exercisable after the demerger, the put option would effectively have been split in two, giving a put option over TAH and a put option over Echo at (presumably) half the price.

Quite a lot of money can be made in this way, just see Greenblatt, "You can be a Stock Market Genius". In spite of the title, it is a fascinating and informative guide to special situation investing. Oh and most of the time money is made buying not selling into a demerger .

I presume if you had an open short position through a demerger the process would be the same.

As always this is mere amateur advice, so DYOR.

 

[Tyler Durden]

I know that the ASX makes option adjustments on corporate events that affects shares underlying options in a specific way. Whether any adjustments are made depends mostly on whether it is a pro rata event (ie affects all underlying shares equally).

See View attachment 43237. Find it by searching for "option adjustments" on ASX website.

The only real exception to option adjustment is dividend announcements.

So if you had tried to short TAH by buying put options prior to the demerger but exercisable after the demerger, the put option would effectively have been split in two, giving a put option over TAH and a put option over Echo at (presumably) half the price.

Quite a lot of money can be made in this way, just see Greenblatt, "You can be a Stock Market Genius". In spite of the title, it is a fascinating and informative guide to special situation investing. Oh and most of the time money is made buying not selling into a demerger .

I presume if you had an open short position through a demerger the process would be the same.

As always this is mere amateur advice, so DYOR.

Wow thanks for your response, very informative! I'm going to go look for that book tomorrow.

I'm still a bit confused though - at first you say the ASX makes option adjustments, which would basically split my put options into two. I get the impression from that, then, that I haven't really found any 'loopholes' at all, as they have already devised a way to circumvent what I am thinking (which is fair enough).

But then you say quite a lot of money could be made this way? Anyway, I will go find the book and have a read of it. Many thanks for your help

 

[Huskar]

There are not any "loopholes" per se. Rather, the money to be made in demergers comes from the fact that quite often, 1+1>2. That is, a business split in two is often worth more than 2 different businesses together, because one becomes a takeover target, etc. Just look at the Fosters/Treasury Wine Estates scenario currently playing out.