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Tesla stock is splitting this week. That could mean another wild week of trading.
Tesla (ticker: TSLA) shareholders of record on August 21 will receive a dividend of four additional shares of common stock, which will be distributed after the close of trading on August 28. It amounts to a 5-for-1 stock split.
The record date matters, but there is no arbitrage for investors to exploit. When someone sells Tesla stock after August 21 and before August 28, they sell the stock dividend as well. It all works out in the pipes of the trading and reconciliation system.
Shares are up more than 50% since the split announcement on Aug 11—that’s right, more than 50%. Research on stock splits often shows shares can get a bump around a split announcement, but the recent surge is still a lot.
That makes predicting what happens this week anyone’s guess. Investors might want to get into the stock before the split becomes effective, believing that investors will buy lower-priced Tesla stock on August 31, which is when the shares start trading on a split-adjusted basis. On the other hand, it’s tough to justify a 50% increase in value just because the absolute value of any stock price is lower.
Maybe all the good news is already reflected in the stock price, and shares will drop after the split becomes effective. And don’t forget many brokers already offer fractional shares: Investors can own a piece of Tesla for as little as $5.
While fractional share ownership is already a thing, a split can have one fundamental impact: options trading. A Tesla September call option with a $2,080 strike price, for instance, cost about $180 to buy on Friday. An options contract is for 100 shares, so it costs $18,000 to purchase one contract. The price of the option will drop when the absolute share price drops.
It will become cheaper—on an absolute basis—to trade Tesla stock options. But that isn’t much of a reason that shares should rise, or fall, on a split announcement.
Tesla shares are now up about 400% year to date and more than 800% over the past year, crushing comparable returns of the Dow Jones Industrial Average and S&P 500 as well as automotive peers. It was off 0.8% at 12:45 p.m. on Monday.
It has been an incredible run, which has been almost impossible to predict. Calling the stock this week won’t be any easier.
Write to Al Root at allen.root@dowjones.com