NVDA 10 for 1 Stock Split Discussion

Tom Gentile

Posted in
Education

By: Tom Gentile
June 7th, 2024

4 mins read
Image 24

At the market closes today NVDA will execute its 10-1 Stock Split.

What that means a person will have 10 more shares for every 1 share it owned prior to the close. If a person owned 10 shares they will wake up Monday morning with 100 shares of NVDA.

That sounds great, and I contest it is or will eventually be a great thing.

An Important Thing to Know about Stock Splits

The thing everyone should know, if they already don’t is you may have more shares, you just wont own them at the same price they were at the close.

When the sock splits that means the price of the stock splits – commensurate with the amount of the split ratio. If it is a 10-1 like NVDA, the stock will open the next trading day at a price 1 tenth of its closing price. This means if NVDA closes at $1200 a 10-1 split will see the price adjust to $120 the next trading day.

I f someone tried to tell you that in a manner sounding like someone is silly to think that, kindly let them know that you already realize that, and you are not thinking you are going to ten times your money right away.

But what you do know, or will know by studying with me is, you will have, in this case, ten times the amount of stock and the split adjusted price but if NVDA follows the same pattern as so many other stocks that split and eventually over time goes back up to their pre-split price, THEN you will or should have seen a ten time increase on your money, granted you did not sell any shares before that happens.

There are many reasons a company does a split, but I am not here to educate you on that or speculate on why NVDA is doing this.

My things with stock splits from an investment perspective is over time stocks that split tend to regain their pre-split price and that helps an account grow profits due to that.

Stock Splits and the Options Trader

I am primarily an options trader.

There are some things that tend to happen to the price of a stock before they actually split. Here are the top three things as I see it.

  1. On the announcement of a stock split alone can be a catalyst for the stock price to increase as people hear about the split and, knowing they will get more shares at the proportionate price after the split they want to get in on that, thus causing an increase in price.
  2. Going into the split, people who haven’t bought shares yet or those who want to add to their stake pick up more shares, thus driving up the stock price.
  3. After the split, now that the shares are at their split adjusted price some folks who feel they couldn’t have afforded the stock prior to the split now see an opportunity to buy it at this lower cost, THUS, driving up the share price.

In all of these cases, the stock tends to rise in price therefor making a bullish options strategy, sometime one as simple as going long a call option, is how I trade these scenarios.

When the Stock Splits the Options Split

The current strike price of options for the stock that is going to split proportionate to the split. The current premium for those options will do the same.

If a stock performs a 2:1 stock split let’s say a June 21, 2024, $50 call option priced at $4.00 is going to look like this the next morning.

It will be a June 21, 2024, $25 priced at $2.00.

Of course, the intent is to see the stock go higher so the options value goes higher, and we can sell at a later time for profit.

Of course, with options being a fixed time investment we need the stock to move higher quickly and before expiration. And those 3 reasons listed above are some of what could aid in driving demand for the stock and push things higher for us as needed.

Tom Gentile
C1P: Chief 1-Percenter

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