Amazon enacted a 20-for-1 stock split on Monday, but does that make shares of the e-commerce giant a buy?
The Amazon stock split dropped shares from a lofty $2,500 down to about $125 at the open on Monday, which is good for retail traders and especially people who want to buy options.
First, a stock split is ultimately just a marketing gimmick because it doesn’t change the valuation of Amazon. The company is worth about $1.2 trillion either way, but it does give retail traders an opportunity to get in at a more affordable price per share.
That opens the game up for a lot more people who simply couldn’t afford it before unless they were buying fractional shares, which you can’t do for options.
So it does cut the cost of premium for options because when you buy one contract, you have control of 100 shares. And when you have a $2,500 stock, the cheapest options that were out of the money still cost thousands of dollars for one contract.
Options traders like to trade smaller amounts of money and take bigger risks. Now that it’s a $125 stock, you’ll be able to buy one contract for $100 to a few hundred dollars.
At lunchtime Monday afternoon, the price of an at-the-money, $125 strike weekly call option was about $300. Of course, the further out of the money you go, the cheaper the option premium.
So a lot more people can get in the game, which does mean there will be a small fundamental change in how the stock trades…
In Monday’s Blitz Daily with Lance Ippolito, we take a look at online retailer Amazon following its 20-for-1 stock split.
The split, approved on May 25, brought its price from $2,440 a share at the end of last week down to just $125 by Monday morning’s opening bell.
Existing shareholders received 19 additional shares for every one they owned prior to the split.
The split makes shares more affordable for retail investors, placing it in range of companies such as Disney and Netflix, which are currently trading around $108 and $198 a share, respectively, at the time of this writing.
And retail investors aren’t the only ones using this as an opportunity to jump in because the lower share price also makes the options much, much cheaper…
The bulls are placing large bets on the share price heading higher in a hurry, with one dropping $264,000 in premium on over 800 contracts of the June 17 expiration, $130 strike calls.
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