Saturday, August 20, 2005

Profit from Stock Splits

One technique that I've been able to obtain some success trading options is to buy a 2-months out call option when a stock just announced stock splits.

Generally, stock splits occur when shares have risen to a price where the management felt that it's advisable to split them so that they would be more affordable to investors. For example in a 2-1 stock splits, a share selling at $100 would become 2 shares of $50 after the stock splits execution date.

There are various kinds of stock splits, the common being 2-1 & 3-2. The stock would gap up in most instances when the stock splits is announced. If the trend is generally bullish, the stock will rise gradually from the time the announcement were made till the stock split execution date, which is usually about 1 month away. Sometimes at the execution day of the stock splits, the stock may even gap up further if the stock is a sector or industry leader.

I have found more successes buying call options using the stock splits technique for shares which are industry/sector leaders having a daily trading volume of at least 1 million shares. Moreover, I only stick to shares announcing 2-1 splits and of course the shares have to be optionable.

I don't necessarily hold the call option till the stock splits execution date hoping it will gap up on that day. If I've found that the stock has risen to a profitable position after holding the call option for a while but has started showing signs of trend reversal, I would not hesitate to sell the option for a nice profit.

To check whether a particular share is an industrial/sector leader, you can go to http://finance.yahoo.com/, key in the ticker symbol and click on the "Industry" link on the left. Then scroll down to see the "Market Capitalization" information and check whether it is ranked at least position 1 or 2. You can also check the trading volume in the same web-site.

To get email alerts of stock splits the moment that they are announced, I would recommend that you subscribed to http://www.StockSplits.net. It's free.

I hope you would have profitable options trades using this method. I do want to advise you to paper trade and see whether it's effective before you trade with real money.

10 comments:

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Well done on a nice blog Blogger. I was searching for information on stock option software and came across your post Profit from Stock Splits - not quite what I was looking for related to stock option software but very interesting all the same!

Well, Christmas is over and we're all getting ready for the new years and there aren't many trading days left. Although I'm still trying to grapple with where the dollar's headed next year. My feeling is that it's going to be much the same as this - all over the place, but possibly on the ascendant over the year, mainly due the instability in the Eurozone. And as for stocks, I think the safest thing is to stick to trading the indices. There's still too much downward pressure.

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A merry Christmas to you and yours! Amon

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