Share Splits

Most ETPs along with many equities will perform splits to keep the trading price in a range that’s comfortable for traders, few are looking to stick with the no split policy used by BRK.A
For an ever declining underlying like UVXY, this means a reverse split to raise the price back up. UVXY has undergone 10 reverse splits ranging from 1-for-4 to 1-for-10 If these splits we never performed UVXY’s initial price of $40 would now be trading at .00000067 per share. If you take initial price ($40) and back out those splits, the price at inception would be $2,400,000,000. That’s $2.4 Billion per share
For option traders, the spot price can be very important. The granularity of option strikes decreases as the spot price drops. A $.50 move when spot is $40 represents 1.25% between strikes. However if spot is only $10, then the difference between $.50 strikes is now 5%. When spot drops to $5 and the strikes are 10% apart. This makes is very challenging to pinpoint a risk level, open certain spreads, or achieve a desired yield from option writing.

A common concern for traders is what happens to their position when the split occurs. The thing to remember is that if there was anything to game from a split, it would happen the SECOND it was announced. By the time it is actually implemented, any ‘opportunity’ has long passed. Here are things to keep in mind:

  • Notional value does not change. 100 shares @ $10 has the same notional value as 25 shares @ $40, after a 1-for-4 split
  • Option contracts will go ‘non-standard’ but also remain unchanged in notional value. Strike prices will stay the same but the number of shares the contract represents will change (reduced to 25 shares as opposed to 100 in the above example)
  • Non-standard options are less liquid and many brokers set them to ‘closing only’ though with a call some allow new buys or writes.
  • VX doesn’t care where UVXY’s spot price is. Since VX controls where UVXY’s price goes, a split is a non-event for predicting or influencing price action

Share splits are a consideration for traders, but there are no direct alpha opportunities because them

When will ProShares split UVXY next?

Citing the concerns about the next reverse split, many traders worry or plan for it. Here are things I’ve noticed in regards to timing

  • Splits typically occur below a $10 spot, usually somewhere with a $7 handle but has happened as high as $15.48 and as low as $3.81
  • ProShares groups splits together. It is rare that when they announce a split, that it is only a single ticker is affected. They seem to wait until at least a dozen or so can be done at the same time. (I’d guess this has to do with expenses and efficiencies of the regulatory process)
  • The split level (e.g. 1-for-4 or 1-for-5) is designed to move the spot price near the inception level of $40
  • Share splits typically take effect within 10 trading days after the announcement
  • Proshares is mindful of stacking non-standard options. To avoid a fractional option/share representation, Proshares can adjust the split level so that each non-standard option represents a whole number of shares. This was seen for the frequent splits in 2016 through 2017 which left LEAP options created in 2016 to represent a single UVXY share (there were two 1-for-5 and a single 1-for-4 applied to that contract. 100/5 = 20, 20/5 = 4, 4/4 = 1)