Monday, October 9, 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.

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