Stocks splitting: Tesla again
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Tesla's 3-for-1 stock split: what will happen to its options?
In early August, the EV maker specified that a 3-for-1 stock split would take effect on Aug. 24.
What is a stock split？
A stock split means that a public firm splits a share into several shares.
You can think of it as slicing a pizza into smaller pieces.
Let's look at Tesla in more detail.
A stock split may cause the stock price to rise, but there is no guarantee. Stock prices of different companies may not perform the same.
But how will the split affect Tesla's options, also a common investment vehicle used by retail investors?
After a stock split, a clearing company will adjust all its derivatives, a process known as "being made whole", ensuring the resulting price change will not affect its options' nominal value.
So holders of Tesla's options will find they'll get more options contracts for lower premiums, but the whole amount paid for premiums and the right to exercise the options won't change.
Yet a stock split may impact its options' liquidity.
Liquidity measures how easily a security can trade.
From a numerical perspective, it's easier for an options holder to settle one option trade than five seperate ones.
What's more, some investors will choose to trade new options after the corporate action, posing a liquidity risk to holders of the adjusted contracts.
Want to learn more about options？
How about taking an exam before venturing into complex trading>>
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only. Read more