Warning: long-winded but happy fish story below.
A funny thing happened to me in the last few weeks, and I thought I'd share with the thread.
A while back I bought one Jan 80 call contract @ 2'15, before the 12/17 stock split. $80 is $53.33 post-split.
A few days ago I sold the contract for $6 for a gain of 3'1, and it was only when I got my trade confirmation that I remembered/realized that I now owned 1.5 contracts for every presplit contract, so it was really a gain of 6'1. That filled me with glee.
This was my first option trade ever, and in retrospect it all seems to make sense, but I wonder whether it's possible that some dumb-asses like me didn't truly comprehend how a stock split affects option pricing. As I followed the option price throughout the days, it never seemed like the option price dropped to conform with the equity price; the option symbol/root changed (from CYQAP to CYZAX); and the option seemed to disappear for a few days entirely right after the split, leading me to think for a little while that I had pulled a real Homer Simpson and bought something that promptly expired.
Of course, CSCO was rising during this time, and that's why the option went up in price. But I wonder whether the stock split let me eke a little bit more out of the option play.
So, this is my new experiment: watch call options right before a stock split and see whether they drop in price in accordance with the split (this is assuming it's a real split and not a share distribution). If they don't, then this might be a way to exploit true investor confusion (kind of like when people bought stock in Marvel Comics post-BK, or when good news comes out about TCI (symbol: TCOMA) and the share price for Transcontinental Realty (symbol: TCI) rises until people realize they've just bought the wrong stock). |
