Today, our Head Trader and man who can do the splits like Chuck Norris between moving semis, Robb Reinhold, answers a question from one of Maverick's traders about trading options around stock splits.*
From: Brett V.
Subject: Splits question
I was just wondering what your stance was on trading options on a stock that has an upcoming split that occurs before expiry [option expiration]?
Thanks,
Brett
-----Reply Message-----
Hi Brett,
If it's just a stock split, then there really isn't anything to worry about as nothing will be different. All that will happen is that the options will split as well.
However, there can definitely be an effect of buying/selling activity due to a stock split. Typically, what I have seen is the stock rises into the stock split date and then struggles a bit after the split is done. This is typically because the "dumb money" wanted to buy before a split…then people wake up and say, "I don't want to own 1,000 shares of this stock now" when they owned 500 before. These effects aren't as great today as they were back in the late 90's, but it still happens to some degree.
The last thing that I think is noteworthy about stocks that split is that they split because the stock has typically performed well over the past months/years and the price has gone much higher. So, basically the stocks have been in strong uptrends since their businesses are likely improving and the economy is also improving as well.
To sum it up, when people ask me if it is a good strategy to buy stocks that split, I have to answer, "Yes" – not because of the split, but because this is likely a strong stock in a strong sector in a bull market.
Hope this helps,
Robb
* NOTE: Some original wording has been slightly modified for legibility.
