WASHINGTON – In case you haven’t heard, Apple shares and Tesla shares are splitting. No, they’re not splitting up. (They’ve never been a team.) Rather, their highly expensive shares are splitting on August 31, 2020. Meaning that it gets at least a bit easier, or technically less expensive, for smaller investors to buy a share or two in these costly companies from time to time.
Doing the splits: Why?
As we noted earlier, Apple (trading symbol: AAPL) is making an all-too-rare move to split its expensive shares on Monday. That makes it at least somewhat easier for smaller investors to buy and sell the company’s currently costly shares, which are currently around $500 per share, in smaller dollar increments.
Apple shares are headed for a 3-for-1 split. Meaning that magically, if you own one AAPL share @$500, for that one share, you’ll receive 3 more, making a total of 4 shares. Meaning that on Monday, August 31, you’ll have a total of 4 shares. But each of these “new” Apple shares will be worth $125 apiece = $500. In other words, the four new shares are worth the same $$ amount as the old single share, except that you’ll have more shares worth less, but totaling what you had. (More or less, since prices are constantly changing.)
Similar math applies to Tesla shares (TSLA), currently worth about $2225 per share. Seriously. But in this case for every TSLA share you own, you’ll get 4 new Tesla shares for a total of 5 shares post-split. But since I hate this phony company, you can do the math on this one yourself.
Stock splits have recently gone out of fashion
These kinds of splits used to be quite common years ago. But now larger companies like to fancy themselves as the next Warren Buffett, who generally never bothers to split the shares of his Berkshire-Hathaway (BERK/A and BERK/B), which are now phenomenally expensive. Cheaper per share prices are easier on armchair investors like you and yours truly.
Writing covered calls
But these days, many companies aren’t interested in smaller investors any more. That’s too bad, since a nice way to earn extra money on your shares, even in a self-directed IRA account, is to first pick up a round lot (100 shares) or two of a promising stock. Then write a “covered call” (option contract) against your holdings. To grossly oversimplify, the strategy of “writing” (selling) a call option is to set it at a price where the purchaser (you think) is not likely to exercise the call, which would force you to sell your stock to him at the designated price.
Since an option has time value – i.e., it expires worthless at a given date – if you guessed right, you get to pocket the money you got for selling the option (the “premium”) and then turn around and do it again.
I may elaborate on this relatively safe game in a latercolumn. But right now that’s how it works.
Problem is, with a stock like, say, TSLA, buying 100 shares so you could write a covered call (a great idea since this stock is incredibly volatile), would, at today’s price, cost you $222,500. But what small investor has that much moolah? Invested in a highly volatile stock, no less.
Given the increasing number of shares that exceed $100 per share, this has begun to drive the small investor out of the option writing market over the years, denying that investor a nifty opportunity to make a little extra money on the side if your given shares of stock have been a bit boring lately. Which is why I like the idea of splitting expensive shares. We’ll likely see more small investors snapping up Apple shares and Tesla shares post-split.
Changes coming for call writing?
We need to see more of this kind of creative thinking. Although I’m told that the SEC is looking at the possibility of lowering the number of shares you need to own in order to write calls on them. We’ll see. Nothing involving the government ever moves very fast. I could be dead before the SEC makes up its mind.
Final thought: A lot of small investors whose shares split might start immediately buying more shares post-split as the opening prices sometimes spike up. But that’s often a mistake. As soon as rookie investors, who thought they were getting something for nothing, see that they’re not, they often dump the post-split shares, which makes them a better bargain in a few days when prices drop. Given that today is the last day Apple shares and Tesla shares trade before the split, I’d avoid chasing them here. You could be disappointed. Just wait a few days, post-split, and pick up your shares at the new, lower price when they settle down.
But again, be careful on the other side of the trade. Sometimes people go crazy and bid them up without letting them settle down. And these are particularly volatile shares. So be careful.
Meanwhile, have a great weekend. But do keep your eye on the news. You never know.
– Headline image: RoadRunner doing the splits, just like Apple shares and Tesla shares.
(Warner Bros. cartoon image, adapted for satirical purposes to illustrate investing point. Fair use, lo-res image.)