I’m reading a book on options trading (Ansbacher - The New Options Market) and I came across this: Amazon.com announced it was splitting its stock 3-for-1. The price of the stock on January 15th was 140, but because of the split it was worth three times that amount, or 420. Shouldn’t it be the other way round? Stock splits increase the number of shares outstanding, and in order for market-cap to remain the same, the stock price should fall proportionately? Thanks.
sounds like they’re talking about a reverse stock-split= 1 for 3. people always get this mixed up (kind of like foreign currency expressions)
I checked and made sure, but it didn’t say “reverse.” I did a little research of my own and it turns out that there could be two reasons for the increase in price: 1. The stock split initially decreases the price but then, more investors find this affordable and thus increase their demand and drive the price up. 2. People believe that the stock has good long term potential and thus lap up more of it when the price initially decreases after the split. But even still, I don’t get how this guy says the price goes up 3 fold…
AMZN has never had a reverse split. The 420 amount is the nominal amount before the split. http://finance.yahoo.com/echarts?s=AMZN#chart2:symbol=amzn;range=my;indicator=split+volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
juventurd Wrote: ------------------------------------------------------- > AMZN has never had a reverse split. The 420 > amount is the nominal amount before the split. > > http://finance.yahoo.com/echarts?s=AMZN#chart2:sym > bol=amzn;range=my;indicator=split+volume;charttype > =line;crosshair=on;ohlcvalues=0;logscale=on;source > =undefined then the 3:1 split makes sense.
AIG split 20 to 1, from 1 buck something to about 20, now down to 16.
I think the point the author is trying to make is that when you are trading options you have to account for stock splits. If they do a 3-for-1 split and the stock price falls from 420 to 140, and you were long call options with a 400 strike price, they are still in the money, and you should think of the stock as being worth 3x the current price or 3 x 140 = 420.
tobias Wrote: ------------------------------------------------------- > I think the point the author is trying to make is > that when you are trading options you have to > account for stock splits. If they do a 3-for-1 > split and the stock price falls from 420 to 140, > and you were long call options with a 400 strike > price, they are still in the money, and you should > think of the stock as being worth 3x the current > price or 3 x 140 = 420. Yeah, I think you’ve got it right mate. Cheers, it makes sense now. So even though the stock theoretically was worth 420 to the option holders, it didn’t actually TOUCH 420 right? Cuz I’m looking at the Yahoo! Finance AMZN chart and the highest it has ever gone is a little above 100. This is the entire paragraph: “Second, Amazon.com announced that it was splitting its stock three for one. To a public that believed a stock split was a sure sign of future success, this was like pouring gasoline on a roaring fire. And to top it off, there were a lot of doubting Thomases who had thought that the stock was widely overvalued and had built up significant short positions. As the stock rose, these poor souls were forced to buy in their positions, further accelerating Amazon.com’s dramatic ascent. But wait a minute. Did we forget the three-for-one split effective January 5th? Sure the price of the stock on January 15th was 140, but because of the split it was worth three times that amount, or 420.”
And can anyone explain this chart to me, cuz I can’t find anything that even remotely looks like this on Yahoo, or anywhere… http://img231.imageshack.us/img231/7363/28547183.jpg Thanks.
