Trading Options After a Stock Split

When EEM split 3-for-1 on July 24th, two series of options became available. The pre-split options had strike prices around the $130 level (and strikes at $5 increments) while the post-split option series had strikes around the $40 level (and strikes at dollar increments).

The immediate implication was that market professionals all jumped into the new option series and totally disdained the old pre-split series. Our new portfolio suffered for several reasons:
Our graphing software did not work, so it was difficult for us to see where we stood. The Analyze Tab at thinkorswim was no better - it showed 70% gains coming our way in two weeks across a huge range of possible stock prices. Option prices in the pre-split series fell considerably. Traders did not want to deal in options that did not easily translate to the current stock prices.The bid-asked spreads increased by a large margin, making it impossible to get decent prices when either buying or selling. This problem relates to the general issue that market makers just don't want to deal in the old series, and they make it expensive for anyone who wants to trade there.For the above reasons, we recommended that subscribers get out of the old series as soon as it was practical. For us, this meant waiting until the August expiration week when we would normally be buying back soon-to-expire short options and selling the next month out. Rather than continuing to trade the old series, we advised closing out all the pre-split options and starting over with the post-split series.

This policy would result in some costly bid-asked spread penalties and commission costs, but it is a better choice than continuing to trade in markets that have bid-asked spreads large enough to drive a truck through. Sometimes it is best to take your lumps and move on to better things. We expect that our EEM portfolio will be our worst-performing portfolio this month, and may even lose a little. Thankfully, 3-for-1 splits don't come along too often.