Stub Trading

Some companies are, financially, two businesses stapled together: an operating business plus a large stake in another public company. If you subtract the market value of that stake (using the other company's own share price) from the parent's total market cap, what's left over is the market's implied price for the parent's own operations — its "stub." Stub trading means buying or shorting that stub directly, by taking an offsetting position in the stake, rather than trading the parent's shares outright.

The trade is usually built as a pair: long the parent, short the appropriate number of shares of the company it holds a stake in (or vice versa), sized so the stake's price moves cancel out. What remains is a purified bet on the parent's core business — useful when a trader believes the stub is mispriced (too cheap relative to the operating business's real earning power, or too expensive) independent of what happens to the stake's own share price.

Worked example. A holding company has a market cap of $4 billion and owns 30% of a listed subsidiary worth $10 billion, so its stake is worth $3 billion. The stub is 4\text{bn} - 3\text{bn} = \1 billion. If a trader believes the parent's standalone operations are worth \1.5 billion, they'd go long the parent and short enough of the subsidiary's shares to hedge out the stake, capturing the gap if the stub re-rates upward.