Options trading investors have made Citigroup Inc. (NYSE: C) one of the most actively traded classes for exchange-listed options. But things will soon change as Citi has announced a 1-for-10 reverse stock split. That means that for every 10 shares an investor owns she will get one share at 10 times the share’s value when the reverse split takes place.
The stock trades around $5 now and presumably will trade around $50 after the split. Citi has announced the reverse will become effective after the close on Friday, May 6.
So, what does this mean for option traders? At its simplest level, there will be some cosmetic but not fundamental changes on the options a trader already has in inventory. But it may have some farther-reaching implications.
Commentators have wondered whether total options volume will decrease because Citi’s option volume is based in part on its cheap price. Taking it further, if there are fewer Citi traders does that mean the options market will take a hit?
I don’t buy the drop in volume argument. In fact I think it will probably be just the opposite. In my opinion the Citigroup reverse stock split will provide several benefits to traders, increase trading efficiency and increase the total value of the options market.
How the Split May Impact Trading
In options lingo, the notional value of Citi will remain the same after the split. The notional value refers to the monetary value of the shares that can be controlled by an option.
To trade the same notional value, traders will only have to trade one “new” Citigroup option instead of 10. Let’s look at the numbers:
Current C — 10 options = 1000 shares @ $5 = $5,000
New C — 1 option = 100 shares @ $50 = $5,000.
So traders will reduce their trading in C options, causing a decline in its volume and in total options volume, because Citi strikes are always very active.
Go to page 2 for more of Dan Pasarelli’s analysis.