You have to be a special kind of loser to get into the club we’re talking about today. Only the worst of the worst ever make it. They come limping to the door and the bouncer takes a look. If they’re bleeding real bad and death looks imminent, then the big man lets them in. If he thinks they’ll make it on their own, then ENTRY DENIED! Fend for yourself. You’ll be fine.

Rescued from the Reaper!

I’m talking about the REVERSE SPLIT club. It’s not common to see a stock admitted. It’s rarer still to own the wounded warrior. Sadly, I count this week’s entrant among my holdings. So do some of you. Not sure how much the chump owes you guys, but I have in on the hook for four figures.

I’m talking about OIH – the VanEck Vectors Oil Services ETF. After falling to $3 and change, his backers decided a boost was needed to extend his shelf life. I figured a reverse split was in order, but I didn’t think those VanEck boys would so zealous. A 1-for-20 split? Well alright then! Grab the paddles and zap OIH to the moon my friends!

Since Tastyworks is on top of it, they sent me a text and email alert as to what was up. On a side note, ThinkorSwim didn’t say jack. Thanks for nothing, chumps. Here’s the email:

So what happened? VanEck waved a magic wand and OIH went from $4ish dollars to $80+. A 20 fold increase! But it didn’t change the value of your position because they also took away 19/20ths of your position. As articulated by sir Tasty, “each OIH share will be converted into the right to receive 0.05 (New) shares.” So, if you had 100 shares at $4 pre-split then you had 5 shares at $80 post-split. got it? You had $400 in the trade pre-split and you had $400 post-split.

What if the stock begins plumbing the depths anew? Is my max loss now larger since the stock price can now fall from $80 to zero? Nope. Your potential loss doesn’t increase after a reverse split because (as I said) they reduce your share count.

What of Covered Calls?

What if you owned 100 shares before the split and were selling covered calls? Since you now only own 5 shares can you still engage in this strategy?

Actually, yes! The second paragraph of Tastyworks’ email explains that the multiplier for existing options changes from 100 to 5. That means selling one of those calls obligates you to sell 5 shares of stock, not 100. As long as these old type of options exist, you can continue to sell calls against your stock. One contract for every 5 shares owned.

The unfortunate part about this is they’ve become illiquid. The bid/ask spreads are much wider than they used to be, so if you’re going to play, be sure to use limit orders.

OIH now has two classes of options. One has the 5/100 multiplier which controls 5 shares. The other has a 100 multiplier.

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