Due to its dominance in the AI chip market, Nvidia is a major player in the stock market and enjoys the status of being the current standard for graphics processing units (GPUs) in training and running AI models. The demand for these AI chips has led to substantial revenue growth for the company, and they have experienced double and triple-digit increases multiple times in past business quarters.
A company like Nvidia that is a leader in their market, is known for an action called “stock splitting.” Stock splits are a corporate action where a company increases the number of outstanding shares by dividing the existing shares into new shares. This action does lower the price per share, but it doesn’t change the total value of the company.
Our guide will highlight the impact stock splits have on options trading and why traders need to pay attention, especially when dealing with Nvidia. We’ll address how an Nvidia stock split affects options contracts and trading strategies.
Understanding Stock Splits and Nvidia’s History
To get a firm grip on the idea of companies doing stock splitting and how that relates to Nvidia’s history, we’re going to highlight the primary reasons that stock splitting occurs in the first place, some of the most common stock split ratios you find businesses using, and how Nvidia has used stock splitting to great effect as they grow their market share and enjoy dominance in the AI chip market.
What Is a Stock Split?
A stock split is a decision by the board of a company to expand the number of outstanding shares and doing so by taking the existing shares and cutting them in half the double the number of shares available. This move is known as a 2-for-1 split where each shareholder receives two new shares for every one share they previously held. This results in the company holding double the shares they previously had.
Reasons for Stock Splitting
Companies like Nvidia choose to split their stock for several reasons. Many traders take it as a positive sign because it’s typically done with companies that are experiencing growth and an increased interest in new investors looking for options contracts to buy or sell.
Increase Liquidity
The more shares a company has available for trading makes for a more liquid trading experience for investors. The positions are much easier to buy and sell quickly where there’s a large number of shares available. Limited shares that are in high demand lead to less liquidity for investors—they’re much harder to buy and sell as a result. Stock splitting remedies this problem.
Optimal Trading Range is Maintained
Stock splitting is an effective measure for companies to keep their share price at an attractive level for investors. By introducing double the amount of shares, businesses can keep their share price in that sweet spot where investors are interested in buying and selling the stock. Long-term, stock splitting can lead to new investors and higher open interest.
The Stock Stays Affordable For the Trader
Stock splitting can also reduce the price per share because the company is creating more shares—the current shares lose value but liquidity goes up as does open interest and the ability of smaller investors to get in on the stock. Stock splitting can attract many retail traders that couldn’t otherwise be reached in the number of shares stayed limited.
Common Stock Split Ratios
Any stock split ratio is possible, but we’d like to direct your attention to the most common ones used in stock splitting with companies that offer stocks and stock options for trading online. Stock splits don’t change the total value of the total value of the trader’s investment, but the cost per share changes as the number of shares changes.
- 2-for-1— The trader gets two new shares for every one share held.
- 3-for-1— The trader gets three new shares for every one share held.
- 4-for-1— The trader gets four new shares for every one share held.
- 3-for-2— The trader gets three new shares for every two shares held.
Something important to note is that companies can choose to reverse their stock splits in an attempt to reduce the number of shares and increase the stock price. It’s technically possible for this to happen with Nvidia, but we don’t see it happening any time soon.
Nvidia’s Stock Split History
Nvidia has a long history of splitting their stocks that goes back 25 years. There have been six notable instances of stock splitting, with the most recent one taking place on June 7, 2024, and the adjusted price taking effect three days later on June 10.
- June 2000—2:1 stock split
- September 2001—2:1 stock split
- April 2006—2:1 stock split
- September 2007—3:2 stock split
- July 2021—4:1 stock split
- June 2024—10:1 stock split
Historically speaking, Nvidia’s stock prices have gained two out of three times in the following three months after a stock split. To give you an idea of what this looks like, let’s examine how the Nvidia stock price acted following the most recent split on June 7, 2024. The time between the split and the adjusted price taking effect on June 10 saw the Nvidia stock soaring around 30%. The stock price opened at $120 on June 10 and is now trading right around $123, which was an increase of more than 2%.
Could Another Stock Split Occur?
While Nvidia could technically announce another stock split if its board decided for one, it’s highly unlikely due to its massive size and low price on the Dow 30. It’s currently sitting at the ideal price for where their business is, making the likelihood of another stock split for Nvidia highly unlikely.
How an Nvidia Stock Split Affects Options Contracts
When a stock split occurs for a business like Nvidia, how exactly does that change affect the options contracts themselves? We’ll be taking a look at the trickledown effects of stock splits on factors of a contract like the size, strike price, open interest, liquidity, and implied volatility. Stock splits allow traders to retain the value they hold in Nvidia, but the structure of their shares will change—we explain in much better detail below, so keep reading!
Adjustments to Strike Prices and Contract Size
The Options Clearing Corporation (OCC) adjusts existing options contracts to create the best reflection of corporate actions such as mergers or stock splits. The goal is to have an accurate representation of the underlying asset’s value and to ensure fair pricing. The OCC accomplishes this by adjusting contract terms like the expiration date, strike price, and the number of shares.
Example
A 4-for-1 stock split is where the current shareholders will be getting four new shares for every one share they hold. A $600 strike price contract changes to four $150 contracts. The trader still retains the same value, but they have more shares in this case and the value per share is lower now.
Impact on Open Interest and Liquidity
Stock splits can have a profound effect on factors like open interest and liquidity that are worth noting. Stock splits tend to help out smaller, retail investors by making the stock options more readily available and at a more affordable price point.
Open Interest
Stock splits can affect open interest or the number of outstanding options contracts that are currently active and haven’t been closed out, exercised, or left to expire. Not only are the stocks adjusted to reflect the change in the underlying stock price and number of shares, but stock splitting causes the options contracts to increase proportionally to the stock split ratio chosen by the business’s board of directors.
Liquidity
Stock splits usually lead to increased liquidity by making the stock more accessible and available to a wide range of traders or investors. By increasing the number of available shares and lowering the price per share, stock splits results in stock options that can be bought and sold quickly and easily.
The effect of more affordable contracts for retail traders means increased participation in the buying and selling of the stock. This is great for a business like Nvidia, which is such a large market leader because their stock is available to trade for a wide range of investors. It comes down to the laws of supply and demand. Nvidia’s AI chips and other products are in high demand, which necessitates the need for more stock options. The more participants in Nvidia’s stock options will lead to the stock moving up in price and value.
Changes in Implied Volatility and Option Premiums
Nvidia announces possible stock splits have historically led to an increase in implied volatility. The main reason for the rise in volatility is the uncertainty, which often leads to heightened trading activity as traders are bracing for the stock split to affect the liquidity of the stock options and the stock price.
Increased Volatility Explored
More Trading Activity | As lower share prices become more accessible for different kinds of traders or investors, stock splits tend to be an event that draws in speculative trading activity. The higher level of trading volume can result in greater price fluctuations which ultimately leads to higher IV. |
Uncertainty | Going into a stock split, traders are trying to guess at the potential impact of the future stock price and its performance which can lead to significant uncertainty. The unknown of what will happen leads to an increased demand for options which further fuels implied volatility levels. |
Liquidity | Because stock splits can lead to increased liquidity for a stock, the increased level of liquidity can cause larger price swings due to more active trading which serves to drive implied volatility higher. |
Following a stock split, the price for each option contract is lower, which makes it more accessible and more appealing for newer investors due to the lower price. Option premiums are, therefore, much lower leading to many more smaller, retail investors being able to trade the stock. With more contracts out there, traders can enjoy increased room for their stocks to appreciate.
Strategies for Trading Nvidia Options Before and After a Stock Split
If you’re wondering about the best strategies to use before and after a Nvidia stock split, keep reading, and we’ll cover the best moves you can make at each stage in the game to lock in the best profit possible. To keep things simple and easy to understand, we’ve divided the strategies into those you should use before the split and those that are best used after the stock split has been officialized.
Pre-Split Trading Strategies
Check out the best moves to make before the stock split occurs. These pre-split trading strategies ensure you go into a stock split prepared to secure a profit.
Buying Calls Before the Split
The basis for this strategy is centered on the idea of profiting from a potential price increase following the split. It’s betting on an increase in stock price due to excitement. It’s a bullish strategy that requires good timing—traders must buy shares before the ex-bonus date to receive the bonus shares.
Using Spreads to Manage Risk
Using a bull call spread can be a beneficial move for traders before a stock split sets in. A bull call spread involves buying a call option with a lower strike price and selling a call option with a higher strike price. Each one has the same expiration date and the idea is to profit from moderate price increases while also limiting potential losses.
Avoiding Overpriced IV
As there’s plenty of uncertainty in the market when traders are aware that a stock split is coming, there’s an increased demand for options which naturally leads to higher premiums (the price to enter the trade). It’s key for traders to get in as soon as they hear about the stock split to avoid paying the inflated premiums that come with higher demand for options.
Post-Split Trading Strategies
Traders can profit during the time following a stock split, and these are the best strategies for making it happen:
Taking Advantage of Lower-Priced Options
Stock splits result in increased access for new traders due to more options positions being available and lower stock prices. This is the key time for traders or investors to enter the market at a low price which increases their margin for increased profit.
Cash-Secured Puts for Lower Entry Points
Following a stock split, traders can use a cash-secured put strategy that works well with the new share price and quantity of shares out in the market. Selling puts could potentially result in buying shares at a discount. The adjustment that traders experience with the cash-secured put ensures that the value of the options contract remains the same before and after the split, preventing any sort of unintended gains or losses.
Watch for a Post-Split Pullback
A decline in price is known to happen after a stock split, though it’s not always guaranteed to happen. It’s caused by a wide range of factors including a price adjustment to reflect the new share structure and fundamentals, investor sentiment, the general market conditions, or an initial surge in investor interest which could wane.
Risks and Considerations When Trading Nvidia Options Post-Split
Coming off of a stock split, there are some hurdles that traders might have to clear when trading Nvidia options. Check out the primary considerations for navigating the risks that commonly present themselves with options prices following a stock split. We’ll talk about the short-term and long-term market sentiment following a split and managing risk in the aftermath of a split.
Short-Term vs. Long-Term Market Sentiment
Post-split performance largely depends on market conditions and overall demand. In a historical sense, stocks that go through a stock split usually outperform the market in the 12 months after the split announcement. Average returns are around 25%.
Short-Term | Long-Term |
|---|---|
Stock splits will lead to more trading volume and investor interest because there are more shares available to trade and a lower price per share. Demand generally increases as traders see a stock split as a positive signal for the company. However, the influx of new traders due to these conditions can cause the stock price to spike up again due to increased participation. | The stock split will closely mirror the state of the company’s overall financial health, its underlying business prospects, and its potential growth. The market conditions also have a major influence on the long-term trajectory of the stock following the split, while the split doesn’t change the value of the company of the trader’s proportional ownership. |
We mentioned earlier that stock splits can be reversed if the company so chooses. It’s what’s known as a “reverse stock split,” and it’s where the shares are combined to reduce the number of shares and increase the cost per share. This could happen with any company and shows that stock splits don’t guarantee long-term success. If a company isn’t as profitable as it once was, a reverse stock split could occur to ensure an average stock price and several shares that are proportionate to its performance.
Managing Risk with Hedging Strategies
Protective puts are when traders buy put options on a stock they already own to protect against potential losses, and they’re a useful strategy for traders to safeguard gains after a stock split. This move helps traders to limit their losses if the stock price ends up declining. There’s also some upside potential where traders can benefit from any price increase that might occur.
A good example of how this strategy could work following a stock split would be a trader buying a protective put with a strike price of $50 and paying a $2 premium per share. The trader owns 100 shares of the stock, and it’s currently trading at $50 per share. There are two ways the trade could play out:
- The stock price rises, and the trader can sell the stock or they can sell the put options. This comes down to which one is the most profitable.
- The other scenario is that the stock price falls below $50, and the put option can be used to sell the stock at $50, which ultimately limits the downside risk associated with the trade.
Another significant hedging strategy when dealing with stock splits is adjusting your portfolio exposure if Nvidia becomes too large of a position.
It’s advisable to sell a portion of any stock that makes up anywhere from 10-20% or more of your total portfolio to limit the risks associated with the position. Traders can then take that capital and apply it to other investments like other stocks, bonds, ETFs, or mutual funds. It’s key to sell this portion of your position off at regular intervals, spreading out the tax liability. It can help greatly with the bottom line and keep traders from making emotional investment decisions.
Another way to deal with a significant position that takes up 10% or more of your total portfolio is hedging the risks through strategies like collars or buying put options. This move lets traders mitigate possible losses while still retaining ownership of the position. Traders could even pool concentrated shares into a fund with other investors, which gives the trader exposure to a diversified portfolio.
Earnings and Catalysts Beyond the Stock Split
Learn how upcoming earnings reports and AI market developments could affect Nvidia’s stock price post-split. These catalysts can have profound effects beyond the single event of the stock split that could still cause the stock price to rise.
- Earnings Reports: As is the case with most earnings announcements, they tend to drive the price of the stock upward due to traders interested in securing a profit around the event. So even though the stock price goes down after a stock split and there are more shares available, that low price can be undone by an earnings report announcement ,which drives the price per share up.
- AI Market Developments: If there continues to be good news surrounding Nvidia’s products and services (and their continued development), especially with their AI products, you’ll likely see the stock prices continue to rise as more and more traders are interested in having those positions in the portfolio.
Stock Splits Are Opportunities to Profit
Stock splits can have a tremendous effect on Nvidia’s options, trading strategies, and risk factors. Splits increase the number of options available to traders and lower the average price per share, which encourages increased trading activity. Because splits lower the price per share, getting in on a stock after the split is a good strategy for entering a Nvidia trade at a good price.
Stock splits don’t change the fundamentals of the company—they only affect share structure and accessibility. Some of the risks include the long-term picture following the split, where the stock price can still rise, the chance of a reverse stock split occurring if the company is underperforming, and temporary bouts of increased implied volatility. Keep these risks in mind as you trade around stock splits.
Stay informed and monitor implied volatility and market sentiment before making trading decisions around stock splits. To get the most accurate read on the future of the market price and where consumer sentiment might lie, use several technical indicators to back up all your theories. Stay updated on Nvidia’s stock split news and adjust your options trading plan accordingly!
