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June 8th, 2022
First and foremost, thank you to all who attended the first Filthy Rich, Dirt Poor live event. I assure you, we DID practice several times and without fail, we went live yesterday with some technical issues. We will get it fixed for next time. And I’ve learned that I need a better background – how boring of a room compared to John’s office, right? I’ll go put up a bookshelf or something.
We will get the information from the video out to people. Either a prerecorded video or I’ll write about the topics over the next couple of days.
Ok, on to today’s topic of stock splits.
A stock split occurs when companies agree to increase the number of outstanding shares. For example, if a stock is selling at $500/share and it agrees to do a 2:1 split, that means the new stock price will drop in half to $250, but I will get 2x the shares I had before. The value of my shares stays the same. One share at $500 is the same as two shares at $250/share.
Splits increase the liquidity of the stock and can bring the price down to a level where more traders are able to participate. For example, Warren Buffett’s Berkshire Hathaway is a cool $471,499.90/share with no options. That makes it very difficult for retailer investors to take part in his company. Am I going to put my entire retirement account into 1 share of 1 company?
Even a company like Alphabet (GOOGL) is $2344/share and some option prices are over $100, which really means you need $10,000 to buy a single option.
Amazon (AMZN), Shopify (SHOP), Tesla (TSLA), and others are super expensive and quite frankly have been too expensive for me to trade my favorite credit spread strategy.
That is all changing this summer. Amazon just went through its 20:1 stock split, dropping the price to a more reasonable price of $123 per share. It was their first split in over 20 years.
I have been accumulating shares for a while and now have enough shares to start selling covered calls for extra income. Thank you Amazon. While my shares are worth the same, I know have enough to add income to my portfolio.
When a coveted stock like Amazon, Google, or Tesla becomes cheaper, it invites more people to be able to participate. Trading volumes increase and more liquidity is great for options traders.
How many people were selling cash-secured puts of Amazon at $2500/share? Now that it’s $123/share, would that change your feelings about trading one of the largest companies in the world?
The Chicago Board Options Exchange has done studies and mega-cap stocks enjoy a near 350% gain in executed shares (volume) one week after a stock split. Six months after the split, volume tends to still be up about 100% from pre-split levels.
It’s more than just volume. Look at what Bank of America research says about the average performance of companies after the split announcement.
Lower stock prices, higher liquidity, and statistics showing stock splits have the potential to beat the SP500 over the course of a year? Yeah, that’s something I’m very interested in following.
What other stocks are splitting this summer? Keep reading to get your trade ideas…
Alphabet (GOOGL) is offering a 20:1 split to be issued on July 15th.
Amazon (AMZN) recently offered a 20:1 split, effective June 3rd.
Shopify (SHOP) will vote in June at a shareholders’ meeting to approve a 10:1 split. While Shopify isn’t exactly a mega-cap stock and has hit some e-commerce headwinds with inflation, it does hold a 10.3% share of the US retail e-commerce market. They are second to Amazon’s 41% share.
Tesla (TSLA) is being very Musk-like and not disclosing anything. The vote to split is supposed to take place this summer. Maybe it will be like the Twitter (TWTR) debacle and Musk will find a reason to go back on announcing the split. The last time they split in 2020, the stock shot up 80% from the time of the announcement through the actual split.
Please note that not all stock splits turn out bullish, but mega-caps tend to have bullish outcomes surrounding the time of the split, from announcement to post-split. If you’re buying the stock, just make sure it’s something you don’t mind owning, especially in this environment, which is why I listed the companies I did.
There are other mid-cap stocks on the split list for the summer, if you like trading splits.
Now, what is interesting about the stocks I mentioned is they are all part of the Nasdaq exchange. So, if we look at the Invesco QQQ Trust (QQQ), Alphabet makes up over 7%, Tesla makes up nearly 4%, and Amazon makes up about 6.5% of the index. Those three companies are responsible for over 17% of the ETF’s price.
I know what’s going on with the economy and the world struggles, so I’m not saying the Q’s will all the sudden take off and buck the rest of the news, but I’m certainly interested in following statistics that show these stocks that control 17% of an ETF could find their way up over the next 12-months. If 17.5% of the ETF goes up by 25% over the next 12 months, that means the Q’s would go up a minimum of 4.4%, if all other things remain the same.
There are a lot of potential plays you could make here. One could be looking at a LEAP call option and selling against it each month.
For example, buying a 16 Jun 23 $305 call and selling a call with around 40 days to expiration and a 0.15 delta. Roll when days to expiration are around 20.
Why so low of a delta? If I want to gain from capital appreciation of the underlying, I want to sell premium that has a low risk of being called out. There’s an 85% chance I won’t be called out on my sold option.
It’s just an idea though. What is your favorite LEAP strategy? What other LEAP or option strategies you’ve learned from Traders Reserve that could help you take advantage of the upcoming splits?
If you have any questions, comments, or anything we can help with, reach us at any time.
Guest Writer, Filthy Rich, Dirt Poor
Editor, Wealthy Investor Society
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