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By now you’ve probably heard that two of the largest mega cap stocks — Amazon.com, Inc. (Symbol AMZN) and Alphabet Inc. (Symbols GOOGL and GOOG) — have announced potential stock splits, with both planning 20-to-1 splits to existing stocks.

Plenty has been said about what splits mean for stockholders, but if you’re an options trader, you probably haven’t seen much about how you’ll be impacted as a holder of the option contracts. Not to worry, that’s what we’re here for! We’ll cover all the important dates involved with the stock spilt, how the option contracts will be adjusted, and even some of the pitfalls that may occur when you find yourself in an adjusted option contract position.

Do stock splits impact investors?

A stock split doesn’t impact the value of a stockholder’s stake in the company. What it does is increase the number of shares in an investor’s account and decrease the cost of each share. In the end, the market value of the position won’t change (aside from changes due to normal market fluctuations).

The affect on option contracts is similar, and we’ll get into that — with some examples — next.

Past stock splits: Amazon and Alphabet (a.k.a. Google)

Amazon is a little more seasoned in splitting their stock than Alphabet. It has split three times just between going public in 1997 and 2000, while this will only be Alphabet’s second time splitting their stock. The first split was in April 2014, when the company was still Google, Inc. and not yet under the parentage of Alphabet (that shift happened in August 2015). Going forward, we’ll use the current holding company’s name (that’s Alphabet) when referencing the upcoming and prior splits.

Alphabet’s previous spilt was a lot more complex than all the Amazon splits. In a quest to keep the company tightly held by its founders no matter what happened after a split, Alphabet created three classes of stock (A, B and C), which still exist today. The Class A shares (which trade publicly under the symbol GOOGL) and the Class B shares (which do not trade in the public market) have voting rights, while the Class C shares (which trade publicly under the symbol GOOG) do not have voting rights. Notably (and by design), Class B shares, owned exclusively by company insiders, hold ten times the voting rights of Class A shares.

Read more: Stock Splits Are Back. Why Now?

Important dates involved with the upcoming stock splits

The reason we refer to the Amazon and Alphabet splits as “potential” stock splits is that the action is still subject to shareholder approval. Amazon’s anticipated approval date is May 25, 2022 and Alphabet’s is June 1, 2022. Both companies are expected to receive the shareholder approvals, but it won’t be official until this step in the process is completed.

Let’s go over some important dates to keep in mind:

The record date

The record date determines which shareholders are entitled to receive additional shares due to the split. For every share owned on or before the record date, new additional shares of stock are issued. If you sell the stock after that date and before the stock split occurs, you will not be eligible to take part in the split.

Amazon: May 27, 2022

Alphabet: July 1, 2022

The split date

The split date is when the shareholders on record are due the additional split shares after the close of business.

Amazon: June 3, 2022

Alphabet: July 15, 2022

The effective date

The effective date, determined by NASDAQ, is when Amazon and Alphabet common shares will trade at the new split-adjusted price.

Amazon: June 6, 2022

Alphabet: July 18, 2022

What happens to Amazon option contracts because of the 20-for-1 split?

Let’s talk about what it means for an option trader after the June 6th effective date of the Amazon 20-for-1 split:

If an option trader currently has one AMZN option contract in an account before close of market on the record date (May 27th), the investor will keep that contract and receive 19 more to make a total of 20 contracts. All the contracts will be viewable in the trader’s account on the morning of June 6th.

The exercise price — often referred to as the strike price — of all the contracts in the position will be divided by 20 and rounded off. It’s worth noting that this means the trader may have a decimal in the strike price of the option contracts. Also, the price of the option contact will be 1/20th of the price before the split. Obviously, the price of the option will also depend on where Amazon’s stock price is after the split.

Lastly, the number of shares the contract represents (otherwise known as the “multiplier”) does not change. The option contracts will still represent 100 shares of AMZN stock, and, if the price of an option is being quoted at 1.00 after the effective date, the cost to buy that option contract will be $100 (1 x 100) plus any commissions or fees.

An example position:

Say option trader Chantel has in her account two AMZN June 17, 2022 2400 Strike Call option contracts that closed on Friday, June 3 (the split date) at 52.80. On the morning of Monday, June 6 (the effective date), she will see in her account 40 (20 x 2) AMZN June 17, 2022 120 (2400 / 20) Strike Call options, and the price of the option should be about 2.61 (52.80 / 20), give or take, depending on the market conditions at the time.

Let’s break down the math involved for this example option contract position (two AMZN June 17, 2022 2400 Strike Call option contracts) after the Amazon 20-for-1 split:

Contracts: 2 x 20 = 40

Strike price: 2400 / 20 = 120

Price of the options: 52.80 / 20 = 2.64

Note the market value of Chantel’s position does not change (assuming the market prices stay the same, of course). The value would be $10,560 before and after the split.

What happens to an Alphabet option contract position?

Next, let’s look at an Alphabet position. Because the split ratio is the same as Amazon (20-for-1), the basic concepts won’t change — just the underlying stock for the option contracts.

Remember when we talked about Alphabet’s three different classes of shares (two of which trade publicly)? The two symbols that represent the public shares of Alphabet Inc. are the Class A shares (symbol GOOGL) and the Class C shares (symbol GOOG). The post-split math is the same for both, so we’ll just look at the symbol GOOGL in our example:

Wyatt has in his account three GOOGL August 19, 2022 2300 Strike Call option contracts that closed on Friday, July 15, 2022 (the split date) at 91.40. On the morning of Monday, July 18 (the effective date), when Wyatt looks in his account, he will see 60 (20 X 3) GOOGL August 19, 2022 115 (2300 / 20) Strike Call option contracts, and the price of the option should be about 4.57 (91.40 / 20), give or take, depending on the market conditions at the time.

To run the same analysis on the GOOGL 20-for-1 split, the math would look like this:

Contracts: 3 x 20 = 60

Strike price: 2300 / 20 = 115

Price of the options: 91.40 / 20 = 4.57

Like with Chantel, note the market value of Wyatt’s position doesn’t change (assuming the market prices stay the same of course). The value would be $27,420 before and after the split.

Learn more: The Rookie’s Course on Option Trading With Brian Overby

Possible pitfalls of an adjusted option position

After a stock goes through a split, it can create many different strikes in each available expiration. In addition, the exchanges reserve the right to open additional “standard” strike prices. I bring this up because it can cause a liquidity issue. Liquidity in the market means there are active buyers and sellers at all times, with heavy competition to fill transactions. This activity drives the bid and ask prices of stocks and options closer together, basically tightening the spread between the bid and ask.

After the Amazon and Alphabet splits, some option contracts will have “odd” fractional strike prices. The exchange will still make markets for them, but they will most likely open additional strikes that don’t have decimals. As an option trader, ask yourself: If you didn’t have a position in AMZN or GOOGL options before the split, which open contract would you most likely want to trade, the ones with the fractional strike prices or the ones without? Most investors would flock to the contracts with even strike prices (no fractions). This diversion of the volume to the more “standard” strikes (or even priced) may make these particular options less liquid, which, over time, could increase the width of the bid/ask spreads on the adjusted contracts. A wider bid/ask spread implies that an order may be harder to fill at a “decent” price, and this could eat into your profitability or add to your loss in the end.

It’s a factor to keep in mind. It may be prudent to do the math ahead of time and see where your strike price is going to fall. To help you with the calculations, the Options Clearing Corporation (OCC) puts together a circular that does the strike price math for you. You can find and download the circulars on the OCC website — just search for keywords AMZN, GOOGL or GOOG (with dates starting in January 2022), and you’ll find the related information memos.

Corporate actions making headlines

When well-known stocks like Amazon and Alphabet make big moves — like undergoing a stock split — you’re likely to hear a lot of buzz about it. But beyond the headlines, as an investor, it’s important to understand the practical effects of these corporate actions, especially if you hold shares or option contracts in these companies, so you can make informed decisions about your own investments.

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Headshot of Brian OverbyAs senior options analyst for Ally Invest, Brian Overby is a widely sought-after resource for his option trading knowledge and market insights. He has contributed to numerous articles for the Wall Street Journal, Reuters, and Bloomberg, and has had frequent appearances on CNBC Fast Money and Fox Business News. A veteran of the financial industry since 1992, Brian continually seeks to improve the understanding of the retail investor. He has given thousands of option trading seminars worldwide, written hundreds of articles on investing, and is the author of the popular trading resource The Options Playbook and its free, acclaimed companion site OptionsPlaybook.com. Prior to Ally, Brian was a senior staff instructor for the Chicago Board Options Exchange (CBOE) and managed the training department for one of the world’s largest market makers, Knight Trading Group.