Comments on: Reverse Stock Splits and How they Effect our Option Contracts https://www.thebluecollarinvestor.com/reverse-stock-splits-and-how-they-effect-our-option-contracts/ Learn how to invest by selling stock options. Thu, 19 Oct 2017 11:09:21 +0000 hourly 1 By: Alan Ellman https://www.thebluecollarinvestor.com/reverse-stock-splits-and-how-they-effect-our-option-contracts/#comment-132691 Thu, 19 Oct 2017 11:09:21 +0000 /blog/?p=878#comment-132691 In reply to Mitch Rovinsky.

Mitch,

Money can certainly be made selling options with the appropriate underlying security so we must define the reasons why we selected any particular stock or ETF. If those reasons no longer exist, we need to re-evaluate our bullish assessment and move on to a different underlying.

Market volatility is historically low as reflected in the VIX (CBOE Volatility Index…”investor fear gauge”). If our goal is to select the underlying based on a high level market volatility (the greater the volatility, the higher our premiums but the more risk we are incurring), we may need to re-evaluate this underlying. Also, reverse stocks splits are huge red flags for an underlying usually implying declining share price, potential exchange-listing problems and the need for price window-dressing.

Bottom line: Evaluate if the reasons we selected an underlying are still in place. If not, move on.

Alan

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By: Mitch Rovinsky https://www.thebluecollarinvestor.com/reverse-stock-splits-and-how-they-effect-our-option-contracts/#comment-132607 Wed, 18 Oct 2017 18:59:47 +0000 /blog/?p=878#comment-132607 Alan,
I have an unique option based supposedly on an volatility fund. The only problem is there is no volatility, not in the traditional manner. Any volatility in the market is shrugged off within a day and the fund continues to decay. In fact since it’s inception this fund has done nothing but decay and reverse split once or twice a year and is coming up on its next reverse split. It makes no difference if the markets it bull or bear, down it goes it is just the rate at which it goes depending on the type of market. If this is truly the way this is set up there must be a way to make money on the options with the next split coming up. Any ideas??

Mitch R

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By: Alan Ellman https://www.thebluecollarinvestor.com/reverse-stock-splits-and-how-they-effect-our-option-contracts/#comment-18237 Tue, 21 Jan 2014 23:05:11 +0000 /blog/?p=878#comment-18237 In reply to Brad.

Brad,

Your leverage will not be impacted by the split. The Options Clearing Corporation makes sure that buyers and sellers of calls and puts are “made whole” after the split. No free lunch either way. The options purchased before the split will only deliver 25 shares after the split. New options will deliver the standard 100 shares. Even though you will pay more for the new contracts, from a % standpoint there will be no difference. If your plan is to buy long-term options on this security, pre and post-split makes no difference.

Alan

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By: Brad https://www.thebluecollarinvestor.com/reverse-stock-splits-and-how-they-effect-our-option-contracts/#comment-18236 Tue, 21 Jan 2014 21:52:51 +0000 /blog/?p=878#comment-18236 Hello Alan,

Thank you very much for your timely and lengthy answer. I just want to make sure I am clear on a few things. QID January call option is currently priced @ 2.01 per option thus I could purchase 10 lots for a price of $2,010.00. If the cost of the options increased 4 times too, than I could only afford 2 lots for a total cost of $1,608.00. Is this how things work with a reverse split? because if it did, then my leverage would be drastically decreased. Does the volatility of the pre split stock option significantly diminish post underling issue stock split? Thank you again, you are great.

Brad O.

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By: Alan Ellman https://www.thebluecollarinvestor.com/reverse-stock-splits-and-how-they-effect-our-option-contracts/#comment-18235 Tue, 21 Jan 2014 21:40:32 +0000 /blog/?p=878#comment-18235 In reply to Brad.

Hi Brad,

Before I get to your question I want to point out that this is a very risky trade. Although the options premiums are low, it’s still your hard-earned money. If you have accepted the high risk then okay but I want to be sure you are aware of it and made that informed decision. QID will generate 2x the daily inverse returns of QQQ which has been on fire for quite a while. That means that QID has been a “dog”

If your assessment is correct, in 2 years you will generate 2x 10-20% of some figure which may be a figure a lot higher than now, which means QID may continue to deteriorate before (if) the correction. There is a reason here for the reverse split. Check it out.

Anyway, as far as premium is concerned, the time value depends on the underlying security which doesn’t change, the time to expiration which doesn’t change and the implied volatility which may change but not because of the split. So, all things being equal the premiums shouldn’t be impacted much.

Your decision isn’t so much when the trade should be made but if the trade should be made and only you can make that decsion based on your personal risk tolerance and overall market assessment.

Alan

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By: Brad https://www.thebluecollarinvestor.com/reverse-stock-splits-and-how-they-effect-our-option-contracts/#comment-18234 Tue, 21 Jan 2014 20:15:00 +0000 /blog/?p=878#comment-18234 Hello Alan, I would first like to think you for your work. It has been very enlightening. I have a small amount of money $2,000.00 and I also think that the stock market in two years will have a 10%-20% correction. The QID etf inversely follows the qqq index, and the options are very affordable at the time being.They will be reverse splitting this Friday (January, 23, 2014), and I was wondering if the stock option priec will also go up ruining my chance to maximize my profits seeign as I can not buy odd lot options in smaller amounts than 100. Should I buy them now or just wait until the reverse split options fall in price again? Thank you for your time,

Most sincerely Brad

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By: edgessIgnopsy https://www.thebluecollarinvestor.com/reverse-stock-splits-and-how-they-effect-our-option-contracts/#comment-408 Wed, 21 Oct 2009 06:27:30 +0000 /blog/?p=878#comment-408 Hi there, my home page is http://www.google.com

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