What happened

Shares of e-commerce company Overstock (NASDAQ:OSTK) are getting used to going up in recent weeks, and Wednesday was no exception. The stock closed 15% higher for the day, much of which came during afternoon trading.

It's hard to say what exactly is causing the stock to continue spiking, but there's one factor investors should consider. It's just a theory, but it's possible Overstock's upcoming digital dividend has sparked a short squeeze of the stock.

A man draws an upward arrow on a transparent screen with his finger.

Image source: Getty Images.

So what

In recent days, Overstock's stock has gone up a lot. Factors include its own earnings report, general e-commerce gains from the coronavirus, and the possibility Overstock is undervalued compared with its competitors. However, a remaining factor regards the company's upcoming digital dividend.

The digital dividend will award one share of Overstock's Series A-1 preferred stock for every 10 shares of stock investors hold. It trades on the tZero platform, a capital market platform that runs on blockchain technology, of which Overstock is an 80% majority owner. These preferred shares also pay a cash dividend. The digital dividend has been granted DTC eligibility, an ex-date with Nasdaq, registered with the SEC, and the record date of April 27 is already past. Now it's all set to be paid on May 19 and could be causing a short squeeze.

Now, short interest in Overstock isn't particularly high. According to data from Nasdaq, there were 5.4 million shares sold short as of April 15, which is about 13% of shares outstanding. But these short sellers could have been highly motivated to cover their positions. You see, short sellers don't receive dividends on shares sold short -- they pay them. Given how unusual the concept of a digital dividend is, many short sellers might have rushed to cover leading up to the dividend record date, to avoid a bizarre situation. 

Covering from short sellers can contribute to stock gains. And given the stock's incredible climb, Overstock has naturally attracted the attention of day traders, who are still enjoying the ride higher. Shares have climbed over 500% just since March 16.

OSTK Chart

OSTK data by YCharts

Now what

Overstock management said in its first-quarter earnings call that it doesn't know what the face value of its Series A-1 preferred stock will be after the dividend is paid. In theory the price should be correlated with its common stock. But it's possible that low initial volume could spike the price per preferred share.

It's too late for investors to get the digital dividend, as the record date is already past. But I'll certainly be watching what happens with the value of Overstock's preferred shares in the days following the payout, more out of curiosity than anything else.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.