Hi guys. Wondered if a few of you could chime in here. I know calls double and the price halves following a split, however, I have another question: Does the premium typically increase slightly either right before or after a split? It would seem as though it would; however, I wanted someone with experience here to chime in.
For instance, let's look at the June 80 calls. Right now, they are $5.50 underwater, with a $2.30 premium. People are willing to bet on a $7.80 swing. With the split, they will only be underwater $2.75 and the premium will be $1.15, and thus people are betting on a $3.90 swing instead of a $7.80 swing to breakeven. In theory, people would thus be more likely to bid up these options because the risk/reward has fundamentally changed. Some, I know, would argue that since there's twice the shares, it will move twice as slow, and such the reduced premium is justified; however, we haven't seen this following the previous splits - it ends up moving just as easily.
So, the questions are two:
1. What experiences have people had with holding calls through splits (and)
2. Do people believe that the current premium on these options reflect what people would already believe a split would add to the premium?
From my experience the premium doesn't increase due to the split. It is strictly based on volatility. But it is hard to tell (unless you have one of those programs) bc MM are always yanking premium due to equity or time erosion.
I just traded BUCY which split 3/2 (a bit more complicated with the math...not my favorite split) and the premiums went right into the fractional math. No change due only to a split.
But my belief still holds. Anytime you have a good company in a bull market even though a split shouldn't make a difference other than accounting, it always does. Ppl want in on a split and they anticipate runs both before and after, and they do 90% of the time if the above conditions are in play, and no calamity occurs in the market.
Right now, I don't even look at Dec/Sep calls as what they are.....I half their premiums and only think about buy 5, already anticipating the split. That makes them a bit more reasonable in my eyes, but not a whole lot...For instance I was looking at Sep 70's today for $13. Instead of buying 10, I would buy 5 for $6.5, and they would have a strike price of $35. For them to break even at 41.5 seems more reasonable, than to break even at $83. Not sure if it will work like that, but I don't think this stock will have any problem being at $50 by Sep.
I'm not sure that helps, but that's the easiest I know to explain it without all the technical bull.
Thanks for your thoughts. I think people are thinking like you and I both are, which is why the longer term options are probably so much more expensive; however, it doesn't look like this thinking is whittling down to the May and June in-the-money options as much. I'm currently holding the May 60s, and am happy that the premium on those is only .60 or so at the moment.
I just did a bunch of calcs on the Dec options, and those suckers look quite expensive; however, they look to be a great bet for those of us that think the stock will be $75 post-split by the end of the year (giving a trailing PE of 30 at $5/share 06 earnings). In that case, the 95 calls would present a 600% increase vs. what would be a 200% gain by holding the common on margin.
I'm waiting until earnings to take my longer term position, but the Dec 95s, while seeminly crazy, aren't really that nuts considering the upcoming split.