On Jan 28, 2015, Visa (NYSE:V) announced its first 4-for-1 common stock split, under which the company issued 3 more shares against each share held by an investor. These will be distributed on Mar 18 to shareholders of record as on Feb 13. Overall, the company has issued about 1.89 billion additional shares, thereby increasing the total shares outstanding to 2.5 billion from 614 million. Why would a company do something like this and how does it pertain to options trading?
A company usually does this for one reason…marketing. For whatever reason, the individual investor (and to some extent professional traders) prefer to trade stocks less than $100. It is pure market aesthetics. So, Visa increases the amount of shares issued which decreases the stock price and the market cap stays constant. After trading this type of events countless times in my trading career I have noticed two things typically occur: implied volatility increases before the split and the stock gets a nice little bump from new “bargain hunters” buying the stock at a much lower nominal value after the split.
How to play this then?
A simple call vertical should do the trick. I said that often we see a bump in price right after the split. But we are leaving one of our “edges” on the table if we do something like a vertical as vertical spreads typically have very little vega exposure. But we can construct something like a 1x2 back spread that addresses both things we are trying to accomplish. Specifically, I signaled to buy the V 3/27 270/272.50 back spread for $1.50. This amounts to selling one 270 call and buying two 272.50 calls paying $1.50 net debit. This risk chart looks like this:
The key difference we get with this type of signal is the long vega exposure. Referring to the above chart we see that this spread has 0.19 vega to it. So, not only do we have the directional component like simply buying a call or a call vertical, we can profit from a move up in implied volatility.