As of July 18th, 2022, Google (also known as Alphabet Inc) officially went through a 20:1 stock split. This means that the stock is just 5% of the cost that it used to be per share prior to this split. If you wanted to buy a share a week prior, you would've had to pay north of $2,000 for a single share. Now, you can buy a single share for just over $100. Let's discuss exactly what this Google Stock Split means and why this is beneficial for the world of options trading.
A company undergoes a stock split for few different reasons. Firstly, it helps make the stock more accessible for retail traders that may not have enough capital to buy a $2,000+ stock; more expensive stocks tend to deter retail traders to other stocks that run a bit cheaper because they can invest smaller chunks at a time. Additionally, splitting a stock can help with liquidity and prevent expensive stocks from having wide bid/ask spreads. Since Google had a price of over $2,000 per share before, it wasn't uncommon to see the bid/ask spread being as wide as $10-15. This would result in some people unknowingly buying this name at the ask and automatically realizing that they're down a bit on the investment because they didn't wait for the bid. It's not a huge reason companies like to do these, but it is a factor. And finally, companies feel that running cheaper stock prices drive a psychological effect that may actually help the stock go up. While this hasn't been officially proven, it's just an additional lever that companies use to try and keep their stock prices afloat because the cheaper prices instill a feeling that the company is "cheaper" to buy and has more upside.
A stock split doesn't actually change the value of the valuation of the company. In Google's case, the 20:1 split essentially just means that the company has 20 times more shares in the marketplace now. So if you owned 5 shares of Google prior to the split, you'd wake up with 100 shares in your brokerage post-split. But the value of the company and your investment remain the same, so that is unchanged by a split.
This is really exciting news for the world of options traders. When a stock undergoes a massive split like this, it also directly impacts the options chain for the stock. Google's entire options chain is now adjusted to reflect this 20:1 split, and that brings the cost of buying and selling premium to be much cheaper than before. So, for example, if you wanted to purchase a call option that's 10% OTM for just a month out prior to the split, you would have to pay a debit of roughly $3,000 to purchase it. But now following this split, you can purchase that same call option for about $150. Of course, your outcomes would be exactly the same in terms of the percent profit or loss that you have to take on the position, but with this split comes a lot more opportunities for people who can't afford to risk $3,000 on a single options contract. Now your baseline risk comes down to $150, which is much more accessible to the average person.
But, arguably the most important advantage that we get from this stock split is the fact that now it's much cheaper to own enough of Google to write covered calls. The strategy that we love running during bear markets and sideways markets is to write covered calls on our positions to reduce our cost basis and collect income to help us weather the storm. Remember, for every 100 shares of a stock that you own, you can sell one covered call. In Google's case, the liquid capital requirement to write calls used to be north of $200,000 prior to this split. However, post split, it's down to around $10,000! So if we have a lot of faith in Google as a company, we can take $10,000 or so to purchase 100 shares and immediately start selling covered calls. Take a look at the options chain for Google today:
Based off the options chain, we can conservatively sell covered calls that are 1 month out and 10-13% OTM and capture 1% of our investment back as income! If we want to think of it as a rental property or AirBnb, that's essentially like taking a $300,000 property and being able to collect over $3,000 per month in rental income from it on months you decide to rent it out. Best of all - as the price of Google goes higher and higher overtime, then this will help accelerate your ability to pay down the investment even faster! If you do this enough, you can ultimately own 100 shares of Google as a risk-free call option since you can theoretically reduce your cost basis to 0 by selling enough covered calls!
This is why we love writing calls on positions when the market is not rising rapidly. You can aggressively pay down your positions using the income extracted from these covered calls and use it to expand your portfolio as needed.