LEAPS and Stock Splits

Up until a few weeks ago stocks splits were a thing of the past. At least on big name stocks. When I was starting my trading in the late 80’s and the 90’s stocks splits were a constant occurrence. They happened so often that many of the stocks and options learning vehicles had large sections on stock splits. Most of the educational material was from books, magazines and seminars.

With the recent announcements of stock splits with Apple and Tesla I went into my archives to see exactly how stocks react to stock splits. I am mostly a technical analyst, so I rely on the past, or historical movement of a stock to see if the movement will repeat itself. Or how recent movement will affect movement in the next few days, or weeks.

While looking at my old material it reminded me that when there was a stock split there were certain points where to enter or exit a position in the splitting stock. I have them listed as:

Stock Split Rumor

Stock Split Announcement

The Ducktail

Pre-Split Ducktail

Post Split Slam

Stock Split Rumor – Back then there were so many splits, rumors would come out often. Today there are no rumors because there hasn’t been stock splits in years. So with Apple and Tesla there were no split announcements expected. No rumor!

Stock Split Announcement– When there is a stock split announcement the stock usually pops up. With Apple and Tesla this pop definitely happened.  Apple announced a 4:1 stock split on July 30th. The stock went up from the close on the 30th, $384 to the close on the 31st, $425. It went up $41 on the split announcement.  Tesla announced their split on August 11th and on the 12th it was up $180.  I would say the stock movement on both stayed true to my records. The Stock Split announcement is a time to get into the stock.

The Ducktail–  A duck tail is a short pull back in the stock. When a stock pops many times there will be profit taking. This profit taking is the ducktail. This pull back can bring the stock down to below the pre-announcement price. This ducktail did not happen to either stock. They never pulled back. If the stock pulls back this is a good time to get in.

Pre-Split Ducktail – According to my notes this happens 2 to 5 days before the split. This would be this coming week. Both stocks split after the close on Friday. It’s still to be seen if the stock will pull back this week before the split. If there was a pull back, this would be a time to jump in.

Post Split Slam – Next Monday, the first day of trading at the new lower price, the stock should go up. This big pop is sometimes followed by a pull back. This is called the slam. Will that happen? Who knows? The way these stocks have been moving is an indication there could be some profit taking. I will be prepared to sell my position on Monday, late in the day, or Tuesday. If there is a post split slam this is a great time to get in. And I probably will if there is a slam. I could get out if the stock starts to go down and jump back in when I feel the slam is at it’s bottom. If there is a slam, after the slam the stock will usually be off to the races. If there’s no slam, I might just stay in my LEAPS for another month.

Stock splits are a great time to make some nice money. This is evident by this week’s results. I will study these splits because I feel there will be some others to follow. I can’t see big stocks like Apple and Tesla having lower prices than other tech giants and the other tech giants keeping their prices high. I think there are other tech giants watching the results of the Apple and Tesla splits to make a decision if today’s environment is good for stocks splits. The way it’s been going so far, I think other splits will be coming. Watch for the stock split rumors.

When investing with my stocks split strategy, I like to use options. As far as Apple and Tesla, these stocks are just too high to buy the stock. Options give you an opportunity to be involved at a much lower price. All Main Street beats Wall Street readers know I do not buy short term options. They are just too dangerous. I go with LEAPS.

LEAPS–Long-term Equity Anticipation Security

With LEAPS I get into a position much cheaper, but I still get the benefit of an upside move in the stock. A big benefit! Not only do I get this upside benefit, which you would get from any Long Option, but I get a lot of Time Decay protection. Even though I buy an option where the Expiration Date goes out, possibly over a year, I might still only hold the position for a week or 2. I love having the Time Decay protection. If the stock dips I have no problem. If you buy short term options and the stock dips, the Time Decay starts working against you immediately. Many times the decay is so severe the stock can never recover to the point you make money. When buying short term options you have to pick direction perfectly, and the stock has to move very quickly in that direction. Even if I am buying an option the day before a split and plan on selling the day after the split, I buy a longer term option for the protection against Time Decay.

My Biggest Split Trade

As I was looking at my trade history from the old split heavy days I came across a big winner. This trade was with Amazon. I made the trade on 1/4/99. Amazon was at $325 and was set to make a 3:1 split on 1/5/99, the next day.. I bought 4 contracts of the 1/15/99 $330 Call for a premium of $26.15. This option cost me $10,500. This was before I knew about LEAPS. In fact, I’m not sure if there were LEAPS lol. I sold this position 2 day later, the day after the split. After the split I owned 12 contracts of the option (3:1 split). After the split the stock moved up big. I’m not sure how much but after the split the premium was back up to $26.12. I bought the option for $26.25 X 400 = $10,500. After the split I had 12 contracts which was $26.12 X 1200 = $31,344. I made $20,844. Remember this was in 1999. This was a 2 day trade.

This is what I’m hoping with Apple and Tesla.

The way the split Apple 4:1 split will work is if you own 100 shares and the stock is at $500 on the split, you will end up with 400 shares at $125. The split itself will not increase your value, It’s the movement of the stock before and after the split that will increase your value. You are hoping the split process will be as past stock splits and the stock moves up.

With options the split has the same effect on what you own. If you own 1 contract and the premium is at $80, after the split you will have 4 contracts with a premium of $20. You hope your premium will increase as the stock moves up as a result of the stock split process.

I am an options seller. My strategy is based on selling Calls and bringing in premiums. This is a “Slow and Steady, Steady and Slow” way to make a lot of money. Having said that, you know I buy long term options, LEAPS. This is also a great way to make money in the market. You must understand, I’m an options trader! I trade all types of options.

I’ve been getting a lot of emails from young traders, or even older traders with smaller accounts, asking how they could make money with a small amount of money. New traders can only do Covered Calls. I know it gets expensive to buy stock to sell Calls. This is why I started to teach LEAPS. I feel it’s a great way to make money with a smaller account. As I continue to repeat myself, LEAPS are buying options but you get a lot of protection. LEAPS might be a strategy newer traders with smaller accounts might want to work on. The problem is, when a new trader goes to buy a contract out 6 months and the premium is a little expensive they look at the 3 month options. THIS IS A PROBLEM! New traders buying options should stick to LEAPS.

Rate of Return

When I buy LEAPS the order form will have Delta at the end of it. To me Delta is very important.

When you buy a stock your gain will be dollar for dollar of the stock increase. Options are different. The Delta will tell you how much your investment will increase with every dollar the stock moves. If the Delta is .50 the premium will increase 50¢ for every dollar the stock moves. If I want to buy options but I also want my investment to move dollar for dollar with the stock I have to look at the Delta and buy the amount of contracts accordingly. If the Delta is .50 and I want my investment to move dollar for dollar with the stock I would have to buy 2 contracts. This would be the same as buying 100 shares of the stock. Here’s the big benefit with options. If the stock is at $200 per share and I buy 100 shares the price will be $20,000. If I buy the LEAPS the premium might be $40 or $50. If it’s $40 and I buy 2 contracts I will only spend $8000. The stock is $20,000 and the LEAPS is $8000 and the increase in investment as the stock goes up will be the same. This means you make the same money but investment much less. Your Rate of Return or your Return on Investment (ROI) will be much higher. Remember, It’s all about the ROI. This is the power of LEAPS.

This is the week Apple and Tesla will split. Take a look at my LEAPS positions on my “Active Trades/Current Positions” page and watch what I do with these positions. Will I sell before the split? Will I hold through the split? If I sell to lock in profit, will I buy more to hold through the split? It’s all according to how the stocks move this week. It’s very exciting!

If you plan on investing into Apple or Tesla this week with LEAPS, and you have a question, send me an email. If not, watch my positions and learn how stock can possibly move when splitting.

Successful Trading,

Steve

The Options Coach