Papale on Stock Splits

By Steve Papale

Its Christmas in the Midwest.  Traditionally that means cold, dark, sometimes snow.  That’s ok.  I’m a big fan of a white Christmas.   Well maybe its El Nino.  Or maybe global warming.  Or just random warm weather.  But running around today getting last minute stuff I threw on my heavy…windbreaker.  Temp outside on December 23 – 61 degrees.  Wonder if the golf course is open on Christmas Eve.

I’m Italian.  And on Christmas Eve in my house I cook.  Fish, peppers – everything but meat.  Tradition.  So I’m getting the food ready and a friend gives me a call.  Says Nike stock split yesterday 2:1.  He was short some Jan 130 puts and wants to know what he should do.  If you trade equities, whether stock or options, dealing with a stock split is eventually inevitable.

Generally companies split their stock when the share price gets what is perceived as too high, the idea being that the public generally buys shares in 100 lot increments, even though in reality shares can be bought in odd lots (orders other than 100) at any time.  When a share price gets so high that buying 100 gets prohibitive, shares sometimes get split.  Companies simply issue more shares at a lower price.  Current shareholders get proportionately more shares at  the new lower price so the value of their holdings do not change.

In the case of Nike, the split 2:1, meaning that for every 1 share of Nike a shareholder held yesterday, today he receives 2 shares at half the old price.  So yesterday the stock closed around $126.  Today it opened around $63.  Value of my shares is unchanged.  As for the options, one option still controls 100 shares of stock like always – he just has twice as many at half the price.   My buddy was short 5 126 puts at around $2.

Today he is short 10 63 puts at around $1 (126/2=63).  Same value.  If assigned he still has the same out of pocket cost to purchase the stock.  If they go out worthless he still collects the same premium as before the split.  Even the dividend is adjusted and the yield is unaffected by the split.  Generally a company will halve the dividend per share to adjust for the lower share price and greater number of shares.  They pay out the same overall dividend as before the split.  At the end of the day a stock split, whether it’s 2 for 1, 3 for 2 or some other split multiple really means very little for shareholders or options traders.  All strike and other adjustments are done behind the scenes by the company, the OCC and the brokerage firms.  No need to sweat a stock split.

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