You joined whatever.com as an employee when the stock was trading at exactly $20. You were granted ten thousand options as a kiss on the cheek for joining. The stock did extremely well and went to $50/share, at which point the company announced a two-for-one stock split.
Overnight, once this stock split was effected, the shares went from trading at $50 each...all the way down to $20 each. Had you not read this definition, you might be all bummed out, because what was $30 in the money stock option value off of your $20 strike price, subtracted from the $50 market price, just cratered.
But in fact, no, that's not what happened. The stock split, which means that your shares outstanding split as well––that is, you went from having ten thousand options to having twenty thousand options, and your strike price, which used to be $20, is now $10.
So the day before the stock split, you had $3,000 worth of intrinsic value in your stock option, or ten thousand options times the quantity 50 - 20 = $30. A cool $300,000 in the money the day before the split.
The day after the split, you had twenty-thousand options with your $10 strike, and a $25 stock price.
The math? 20,000 options times $15 of intrinsic value, or in the money option value, to multiply out to being the exact same $300,000 in value you had the day before the stock split.
So yes, stock splits are an overhyped press release. Not something to get all hyped up about.
Related or Semi-related Video
Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
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