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Monday, October 09, 2006

Another Reverse Arbitrage Deal Completed

A while back, I completed a stock deal that gave me a 2,567% ROI in 212 days. This was accomplished through the magic of reverse merger arbitrage - a play where you buy a few shares of a stock that is going to undergo a reverse split with special handling for odd lot shareholders. See my previous post about this for more details.

The deal I just completed was for far less in terms of dollars, but again provided an astounding ROI: 364% in 59 days, which works out to an annualized rate of 2,251%! Here are the details.

VTUD, a stock that trades on the "pink sheets" (OTCBB), had announced a 1 for 40 reverse split with special instructions that, after the split, no shareholder would have less than 100 shares. The reason given for this split was to increase the per-share price so that the company would be more attractive to potential buyers. Full details about the split can be found in this SEC filing. The reverse split was effected last week and the stock now trades under the ticker symbol VNUN. Today, the new stock was reflected in my brokerage account (it usually takes a while after the split happens for the brokerages to get the new stock from the company) and I sold.

I purchased 30 shares of the stock at $0.05 per share plus a commission of $12.95, for a total cost of$14.45. After the split, I had 100 shares, which I sold today at $0.80 per share plus a $12.95 commission, for a total of $67.05. My net profit was $52.60 in 59 days. I could have made a couple more bucks by only buying 1 share instead of 30. However, I choose 30 shares because that was a number used as an example in the company's SEC filing and, if I had to argue with my broker about how I should have 100 shares after the split, I wanted a crystal clear example. Besides, at five cents a share, the extra 29 shares only cost me $1.45.

Now I know I said I would alert you guys to any more reverse arbitrage opportunities I found, but there was a big unknown with this play that caused me to not tout this one (although it was discussed in the comments of my other post): the company wasn't actually merging with anyone yet. The reverse split was just being done to make the company more attractive to potential buyers. So there was much more uncertainty about what the post-split stock price would be. And this proved to be a valid concern. A true 1 for 40 split would mean the post-split price should be 40 times greater than the pre-split price. My 5 cent stock should have been worth $2.00. The stock was instead trading around $0.80 for the last couple days and that's what I sold for. This uncertainty also stopped me from making this play in the four or five different brokerage accounts I have and instead, I only did this in one account, thus limiting my gains further.

So, dollar-wise, I didn't make tons on money on this. However, I did get a very nice ROI and picked up some more experience with these penny-stock plays.

13 comments:

Anonymous said...

cool. you are 2 for 2 with the reverse arbitrage thing. It kinda sounds to good to be true but I think it is worth a try. There isnt much to loose. Keep us posted on future deals. Keep doing what you do. I love this blog

Anonymous said...

How do you go about finding a reverse arbitrage deal?

Shaun said...

Anon1 - Thanks for the kind words!

Anon2 - I find these deals through various means. You can search the SEC's database of filings for words like "reverse split." You can look through various stock trading oriented websites, such as ragingbull.com for the same words. The world of penny stocks is a place that is wide open to all kinds of scams, so you do need to do some serious due diligence before investing though.

Dan said...

Damn you Shaun!

Where's the props to me for the idea? You will recall that I gave you the inside tip :)

Worst thing is.. I didnt ever make a move.. I actually forgot about pursuing this. Anyway, I will keep 'em coming. Nice move.

Dan

Shaun said...

Dan - Ha! Actually, I found this one about a day before you told me :-) As for not pulling the trigger, you've only got yourself to blame for that one! Stay tuned here. I promise I'll post about the next opportunity I find!

Louis said...

What brokerage did you use? I have Ameritrade and still am waiting for shares.

Shaun said...

You need to call Ameritrade. It's been over a month since this one split and you should have gotten your new shares a long time ago. You'll probably need to speak to someone in their reorganization department.

Anonymous said...

Great idea, I will get on that tomorrow. Did your shares come through Ameritrade? If someone else got shares through them, that will be good support for my case.
Best,
Louis

Shaun said...

I don't know of anyone who used Ameritrade for this particular stock, but if you check the comments on the Art Of Money blog that I linked to in this thread, you'll see there were some people who used Ameritrade for the QRUS deal. The best thing to do is get the company's SEC filing in front of you when you call. Read them the part of the filing that takls about how the reverse split will be handled. Tell them the date of the SEC filing and they can look it up as well, while you are on the phone. Good luck!

Anonymous said...

Ameritrade agrees I should be rounded up to 100. They had submitted the request to TA on Oct 9, but have not received shares yet.

Anonymous said...

Got those VNUN today in Ameritrade accounts.
Shaun, what broker did you use? It seems like people from Schwab or Scottrade seem to get their shares a lot faster on these deals.

Shaun said...

Just now? Wow.. That's over a month.. I use Schwab and got the shares in about a week. Were you calling Ameritrade daily? It probably helps to be the squeaky wheel.

Anonymous said...

Ya, according to other Ameritrade holders, they all go theirs yesterday, too.
I actually had called the Reorg department just the day before and asked someone to look into it. Sketchy...

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