There is a general investing philosophy on the street that if a company has announced stock split, the management is signaling strength in the stock and would like to invite more players aka more investors. But wonder why? this is purely my version, this is one of the easiest way for the top management to double up their earnings. Why? check out the history (I have not done that part but I am sure based on my experience) for quality companies that announced splits and what happened to their CEO/Founder’s wealth. Microsoft, Dell, Apple, and many more, it doubeled, tripeled, quadrapled and many more (in a non-taxable way). I am limiting my scope of dicussion to quality companies only. Broadly speaking, if the stock splits, after sometime, it reaches to the same level (base assumption- company has to deliver good value and results, for instance KO, MSFT, DELL). Now there are examples where the stock does not split and it continue to rise e.g. Google, Berkshire Hathaway…but let’s not wrorry about those.
Let me get back to the point, how do we make money from this event? Generally speaking, the stock rises after the split is announced (check out any “after announcement” movement, if no past data is available, keep an eye on the upcoming ones). And it slowly continue to rise till the split date. There are two ways to play this:
- First way is to play intraday and this one can play with straight call. One shd be able to read and understand intraday charts and have good entry/exit set-ups.
- 2nd is for playing relative longer (till split date), one can play either bullish calendars, bullish diagonals or bull put credit spread. One may play straight call as well but then theta works against you. Check out past post on POT and BWLD.
Whatever you decide, this is something you may wanna ponder a bit more and include into your speculative directional strategy toolbox (with higher probability). But can you play this with all stocks that have announced split? I shall cover that some other time. Meanwhile, it’s a food for thought.