Today’s newsletter offers you a quick guide with everything you need to know.
I’m going to cover the key elements for anyone holding stocks and options in either company.
This same information applies to any stock split.
If you are new to options, I suggest you check out my Ultimate Beginners Guide to Options right here.
Stock split types
Companies can do a forward stock split or a reverse split.
Forward stock splits increase the number of shares and reduce the price.
Reverse splits increase the price and reduce the number of shares.
Tesla stock split
Let’s start with Tesla.
Anyone holding Tesla shares as of August 21st will be eligible for the stock split.
Note: This August 21st date is somewhat meaningless to us as traders because anyone who owns shares going into August 21st is eligible no matter when they buy. It’s more of a legal thing than anything to worry about.
On August 31st, you will receive 5 shares for every one you owned.
The price of Tesla will be decreased by 80%.
In other words – the total capital you have invested remains the same.
Here’s a quick example.
- Jeff Bishop owns 100 shares of Tesla on August 21st.
- The closing price on August 28th was $2,216.99 (we’ll say it was $2220 to make the math easier).
- That means he owns $2220 x 100 = $222,000 of stock.
- When the markets open Monday morning of the split, he will own that same amount of stock, just in a different form.
- When Monday opens, Jeff will own 500 (5x more) shares of Tesla, but the price will now be $444 (5x less).
- He still owns $444 x 500 = $222,000 of Tesla stock
Tesla options split
Just like the stock, options will make similar adjustments.
If you own options prior to the split that expire sometime after the split, you will wake up to 5x as many options in your account at 1/5th the price they were on Friday.
Adding to the example:
- Jeff Bishop owns 100 contracts of Tesla $3000 calls expiring Septmeber 18th, 2020 at $5 a piece
- His total capital invested is 100 contracts x 100 shares per contract x $5 = $50,000
- He wakes up Monday morning to 500 contracts with a $600 strike price worth $1 a piece
- His total capital invested remains the same at 500 contracts x 100 shares per contract x $1 = $50,000
Apple stock split and options
Apple’s stock split will work the exact same way as Tesla’s with the exception that they did a 4 for 1 stock split instead of a 5 for 1.
That means anyone holding stock or options in Apple will wake up with 4x as many shares or contracts in their account at 1/4th the price.
The amount of capital you invested remains the same.
What if I sell the shares before August 31st?
- You’re not entitled to any additional shares. It’s the same as any other stock you buy at one price and sell at another. The stock split has no effect on you.
What if I buy shares after August 21st and hold them through August 31st?
- It works the same for you as if you bought them before the 21st. When you wake up on the 31st, you’ll have 5x as many shares as you had Friday and 1/5th the price for each share.
- Why they make this complicated by adding the extra date of the 21st in there is more for legal reasons. Practically, it makes no difference to traders.
Do I need to do anything to make this happen?
- No. All brokers should do this automatically while you sleep tight. If you wake up and things aren’t what you expected, call them immediately.
Do any of the option Greeks change because of the split?
- Yes, but as with the stocks, it’s all proportional to the split, so the net affect is zero.
Will these stocks keep running the way they did into these splits?
- Maybe, maybe not. If and when I do make trades in these names, my High Octane Option traders will be the first to know.
Where can I learn more about stock options?
- A great place to start after my Ultimate Beginners Guide to Options is my Total Alpha Options Masterclass.
What if I’m not comfortable with all these moving parts?
- Don’t trade or own the stock or options into these events. Nothing says you have to trade these stocks. There are PLENTY of other trades out there just like my Bullseye Trade of the Week.