The number of options contracts will increase by a factor of ten, while the strike price will shrink by a factor of ten
Nvidia stock is soaring ahead of a 10-for-1 stock split scheduled forJune 7.
The split should broaden investors’ access to trades.
Options traders should be aware of how the split changes the trade mechanics.
Nvidia (NVDA) reported first-quarter fiscal earnings on Wednesday, and the stock is up nearly 10% as of today. NVDA posted revenue of $15 billion and earnings per share (EPS) of 5.98—a massive increase from just a year ago and above estimates.
The stock rose above $1,000 for the first time after reporting stronger-than-expected revenue and delivering a rosy outlook fueled by the artificial intelligence boom.
Analysts were quick to move up their price targets in the following days, encouraged by the company’s revenue forecast of $28 billion for the current quarter
What the split means for investors
The stellar numbers weren’t the only thing investors cheered about; Nvidia also announced a 10-for-1 stock split, effective June 7.
On that day, the stock’s price will be split, or divided, by 10. That means the price will convert to a tenth, or 10%, of the current value, and existing shareholders will receive ten shares for every one share owned.
This increases the liquidity of the stock, allowing more investors, especially those with smaller accounts, to participate in purchasing shares, effectively increasing the investor base.
What it means for options traders
For options traders who are holding a trade through a split, the number of Nvidia options contracts will increase by a factor of ten, while the strike price will shrink by a factor of ten—maintaining the mechanics of the trade pre-split. For example, if you are holding a $1,200 call option and continue to hold it through the split, it will automatically convert to a $120 call option (strike price) but you will have ten of those contracts.
Traders should keep the theta and gamma of those options in mind.
Theta: The lower price of the stock means that the strike prices will be lower. That said, short premium strategies will collect less premium in absolute terms. However, this won’t change in percentage terms, and the risk-reward on traders will remain relatively constant on trades if the split were doesn’t occur.
Gamma: Because the stock will have a lower price, the dollar value for the gamma—the rate at which delta changes—will be reduced. That would resulting in smaller changes relative to the delta because the equivalent percentage change in the stock represents a smaller dollar move on an absolute basis.
The table outlines the hypothetical changes that will occur post-split based on today’s Nvidia price of 1,053.
Greeks/Trade Mechanics | Pre-Split ($1,053) | Post-Split ($105.30) |
Delta | 0.5 (50%) per contract | Remains 0.5 (50%) per contract |
Gamma | 0.02 per $1 stock move | - Smaller absolute impact per $1 move |
Theta | -0.05 per day | Smaller absolute decay due to lower option prices |
Stock Price | $1,053 | $105.30 |
Delta Change (per $1 stock move) | Delta changes by 0.02 per $1 move (0.5 to 0.52) | Delta changes by 0.02 per $1 move (0.5 to 0.52) but with a smaller absolute impact |
Accessibility for Traders | Higher contract value limits some traders | Lower contract value makes options more accessible |
Premium | Higher due to higher stock price | Lower due to reduced stock price |
Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater
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