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Tales of a Technician: A Tale of Two Splits

May 25, 2021

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Two stock splits were announced on the Street this week and it provides a teaching moment. The first came from semiconductor giant, Nvidia, and was a traditional split where they lower the share price while increasing the number of shares. The second came from the iShares Gold Trust, IAU, and was a reverse split that lifted the share price while decreasing the number of shares.

Let’s take a closer look at each.

Nvidia 4 for 1 Split

Let’s first get the math out of the way. Nvidia stock will split 4 for 1. That means the stock will drop to 1/4th its current value, but each shareholder will receive four shares for every one share they previously owned like so:

Pre-Split: 100 shares @ $600

Post-Split: 400 shares @ $150

Notice how there’s no net change in the value of the position. You had $60,000 in Nvidia before the split, and you have $60,000 after it. There are multiple reasons why trader should cheer the news.

One: It cheapens the share price bringing a new class of potential buyers into the fray that were previously turned off by the sky-high price.

Two: It increases the daily trading volume, and thus liquidity. The 50-day average volume for NVDA right now is 7.5 million. It could go up 4x after the split to 30 million shares. That will tighten bid-ask spreads and make it easier to buy and sell.

Three: Options liquidity should also improve. The distance between strike prices will shrink giving more flexibility in strike selection too.

Four: The cheaper share price will make trades like covered calls and naked puts much easier to build given the lower capital requirement.

Five: The announcement of the split is a form of signaling. It is the company saying they believe the share price will continue to rise. Businesses don’t announce splits when they’re pessimistic and business is bad.

Six: The anticipation of the split should provide a tailwind to the share price. Think about the ramp in Tesla shares running up to its split, for instance.

IAU 1 for 2 Split

GLD is arguably the most popular gold-based ETF on the Street. It was the first to market and has the most memorable ticker symbol. During the height of gold’s 2011 run to $1,900, its assets under management momentarily swelled past the S&P 500 ETF (SPY).

You may not know this but BlackRock has its own gold-based ETF within its suite of iShares funds. It’s the iShares Gold Trust and trades under the ticker IAU. Its price movement mirrors gold futures, and thus GLD. But the big difference is the share cost. While GLD costs approximately $175 per share, before this week’s reverse split, IAU only costs about $17. That made it a much more attractive option for small-dollar traders.

But, I guess BlackRock decided It was time to boost the share price a bit. It’s an interesting move. Normally we don’t see reverse splits until something pushes into the single digits because of a big bear market. Gold is in the middle of a bull run and is well higher than it was in 2015 and 2016, so the timing of the decision is curious.

IAU will split 1 for 2. That means the stock doubled, but each shareholder’s position will be cut in half like so:

Pre-Split: 100 shares @ $17

Post-Split: 50 shares @ $34

From a trading perspective, I actually like the move. The premiums available when the stock was in the low- teens was abysmal. Now that prices are at $36, I’m actually starting to see enough juice to make naked puts and covered calls interesting.

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