📈Nvidia's Stock Post-Split: 🛡️Collar Strategy Defies Fluctuations

$NVIDIA Corp(NVDA)$ announced its first quarter financial report for the new fiscal year on 22rd May , which exceeded sales and earnings expectations and also said it plans to split its stock.

Shareholders of record as of the close of trading on Friday, June 7th, will receive additional shares. Trading will commence on the adjusted split price starting Monday, June 10th.

1. Stock Price, Quantity, and Options Contract Adjustments Post-Split:

$NVIDIA Corp(NVDA)$'s stock split, with a ratio of 1 to 10, will result in a ninefold increase in the number of shares and a price that becomes one-tenth of the original.

Holders of options contracts will see their number of contracts increase tenfold after the split, but the strike price of the options will become one-tenth.

For example, on the split date, an options contract with an original strike price of $1000 will be transformed into 10 contracts with a strike price of 100 each.

The overall options prices will remain unchanged. The new and old options will be distinguished with different symbols after adjustment.

2. Historical Insights: Stock Splits and Their Impact on Share Prices"

Throughout history, many big-name companies have seen double-digit average gains in their share prices in the year following a stock split. Let's explore some notable examples and consider the implications for investors."

Stock Split Success Stories:

• $Amazon.com(AMZN)$ : After completing 3 stock splits, Amazon witnessed an average increase of 209% in the following year.

• $Microsoft(MSFT)$ With 9 stock splits under its belt, Microsoft's shares saw an average gain of 47% in the year post-split.

• $McDonald's(MCD)$ : McDonald's, not a tech company, also enjoyed the benefits of stock splits, with 9 splits leading to an average 22% increase in the subsequent year.

• $Coca-Cola(KO)$ : Similarly, Coca-Cola had 9 stock splits, which resulted in an average 11% increase in share price.

• $NVIDIA Corp(NVDA)$ ,during the 2021 1-for-4 stock split, the stock price was around $600,and it surged to a peak of $835 just before the split took effect. Post-split, the stock price skyrocketed by over 450%.

The Downside of Splits:

• $Apple(AAPL)$ : However, not all stock splits result in gains. Apple experienced a 61% plunge in share price after a stock split in June 2000, largely due to the burst of the dot-com bubble.

Strategic Hedging:

• Strategic Considerations: Given $NVIDIA Corp(NVDA)$ 's current high stock price and the potential to break new records, it's prudent for investors to consider hedging strategies. Here, we recommend the straddle options strategy as a viable approach.

3. What exactly is a collar option?

To protect against the downside risk of stocks, there is a strategy of buying put options (Protective Put), and to reduce the cost of holding stocks, you can sell covered call options (Covered Call). In order to take both into account, a new strategy called collar options was born.

4. $NVIDIA Corp(NVDA)$ collar option strategy example

Assume that an investor holds 100 shares of Nvidia at a current price of $1,154. As technology stocks continue to plummet, the investor is unsure about how the price will change in the near future and wants to buy insurance for his position. The collar strategy can be used.

Specifically, the investor can sell a call option with an exercise price of $1,300 and an expiration date of July 5 at a price of $16.04 (earning $1,604).

Data source: Tiger Trade

You can also buy a put option with a strike price of $1,030 and an expiration date of July 5 for $15.22 (costing $1,522).

Data source: Tiger Trade

The income and expenditure of the two options mostly offset each other, with a total income of $82. According to this plan, the investor has established a protective strategy at a very low cost.

The core of the collar strategy is the protection function. If the underlying price falls beyond the strike price of the bought put option of 1030, no matter how low the price falls, the loss will be locked.

Maximum loss = buy put option strike price - underlying purchase price + sell call option premium - buy put option premium, that is, US dollars. No matter how much Nvidia falls before the option contract expires, even if it falls to $1, the investor's maximum loss will only be $12,318.

In addition to locking in the maximum loss, the collar strategy also maintains the ability of the portfolio to gain income. When the underlying price rises to the strike price of the sold call option of $1,300, the portfolio gains the maximum income. Maximum income = sell call option strike price - underlying purchase price + sell call option premium.

Data source: Tiger Trade

From the case, we can clearly feel that the collar strategy gives investors the ability to keep the "fruits of victory" and prevent risks after Nvidia's stock split. After the stock split volatility ends, investors can also cancel the collar strategy and trade in the direction based on their personal ideas such as bullish or bearish.