Amazon enacted a 20-for-1 stock split on Monday, but does that make shares of the e-commerce giant a buy?
I appeared on Cheddar on Monday morning to discuss this very topic…
The Amazon Inc. (Nasdaq: AMZN) 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…
And that’s in volatility.
Amazon Stock Split: Is It a Buy Now?
Here’s the big thing about the Amazon stock split…
The stock was down about 40% this year… and then it bounced 20% in a little over a week after this announcement. So they’ll take money from wherever they can get it right now. Beggars can’t be choosers!
So it’s worked so far. But would I buy a stock after the split?
Heck no.
In fact, it’s an opportunity to take some profits or exposure off the top following this bounce. I see a little more upside but like I said, the stock was down 40% on the year and just got half that back in a week.
But everyone with a retirement or passive investment account already owns Amazon in some form. This stock is 6.5% of the Invesco QQQ Trust Series 1 (Nasdaq: QQQ), a widely traded and held ETF that tracks the Nasdaq 100.
So Amazon didn’t need new investors per se… it all just comes back to the option premium. We likely will, however, see more volatility because it’s traded more in options.
There could absolutely be crazy moves in the share price following the Amazon stock split, and that’s one of the key takeaways here. No, it won’t be meme-stock level volatility, but there will be more of it.
When it comes down to it, am I a buyer on the Amazon stock split alone?
No, I’m not a buyer. Now, on fundamentals, if Amazon can prove that Amazon Web Services is still growing north of 30% a year, that’s a good reason to stick around because it is getting cheap after the sell-off this year.
Stock splits alone are never a reason to invest long term in a company. But the stock is definitely more in play when it comes to options traders.
Are there any topics you’d like to see me cover or questions you’d like answered? Send me an email at jeff@joyofthetrade.com! And be sure to stay ahead of the markets by subscribing to our YouTube channel and our Instagram page for all of the latest!
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