How Stock Splits Affect Call Options

Video Transcript

"Hi, I'm Roger Groh with Groh Asset Management. Do you all own a stock option? Well, has the underlying stock in that option split recently? Or, paid a dividend? And, therefore, has your cost basis changed in that option? Well, don't worry. If the number of underlying shares splits two for one, you will then own twice as many options as you did before the split. The problem is this: that there is going to be some lag between when a split occurs, and when you can actually get access to it. Now, if the brokerage firm that holds those options for you is really on the ball, maybe they could do it quickly, but many are not. I mean, this is an expense area for the brokerage firms or the banks, and they're not anxious to staff it up, to make sure your account is up to the minute. And if you're trying to trade options, and you're really depending upon a quarter of a point move in the stock, or a dollar, or some small amount in the stock... wow. I mean, you could move from no profit, to profit to.. back and forth. You can back across the forth the line of profitability or not profitability ten times during the day. So how do you deal with that? Well, if you set up instructions ahead of time with a brokerage firm, telling them what you'd like to do, including the stock splits, then they're obligated to do it for you, and make sure that the transaction goes smoothly. So, like everything else, know that there's been a stock dividend, know that you're entitled to more stock options as a result of that, and then notify the brokerage firm or bank--or whoever holds those options--of your intentions ahead of time. And last but not least, check with your lawyer or trusted stockbroker, as to the implications and risk in doing that, because most people who use stock options lose money. I'm Roger Groh, and thank you for spending a little bit of time with me."