The effects of a stock split on gamma, delta, and IV
Tl;dr: Increase IV across the board, multiply total delta by split amount, and square total gamma. Buy $AMZN, $GOOG and $TSLA post split options, probably.
“How stock splits affect delta and gamma
Imagine you’re holding one at-the-money $GOOGL call option at the $2800 strike, prior to the 20:1 split, with a delta of 0.50.
What happens to the delta when you hold through the 20:1 split? Now you own twenty $140 strike calls, all with a 0.50 delta. So even though the individual deltas have not changed, your total delta has risen by a factor of twenty, from just 50 all the way to 1000! That means that after splitting, the options in question are twenty-times more reactive to a $1 change in stock price.
Of course there is a counterbalance to this effect — a $1 change in a $2800 stock equates to a 0.035% change. A $1 change in a $140 stock equates to a .7% change. Still, this substantial change in total delta can make a massive difference for option holders, particularly those using multi-legged options strategies like spreads and condors.
The effects of a stock split on an options gamma are even more pronounced. Let’s revisit the above example of our at-the-money $GOOGL call option to find out why.
In the example, imagine that the at-the-money $2800 strike call option has a gamma of 0.002. That means that if you have a 0.50 delta, and the stock rises by $10, your option will gain two deltas, raising your total delta to 52! The same is true in reverse. If the stock falls by $1, you lost two delta, and now have a 48 delta option!
Now, you have a 20:1 split: what happens to your option gamma? You have twenty call options, at a $140 strike, and the gamma is multiplied by twenty, meaning the gamma is now 0.04 for each option. So now, you’ve have twenty-times as many options, and twenty-times as much gamma (from 0.002 pre-split to 0.8 post split), leading to an overall gamma increase of forty-times!”
Submitted March 29, 2022 at 03:14PM by LostToAModIn7Moves
via reddit https://ift.tt/IWxqfAm