Share Splits Explained
and How They Affect Options
Dear Investor.
Zee here. I am writing this extra piece this week as some ETFs and Netflix (NFLX) are having a share split exercise this week.
Share splits can look confusing at first, but the idea behind them is actually very simple. Companies use splits to adjust the number of shares in circulation without changing the total value of the company. Think of it like cutting a pizza into more slices, more pieces, but the pizza itself is still the same size.
Below is a straightforward guide to help you understand what share splits are, why companies do them, and what happens to options during a split.
1. What Is a Share Split?
A share split increases the number of shares a company has by dividing each existing share into smaller portions.
Example: 2-for-1 Split
Before split: You own 100 shares at $100 each
After split: You own 200 shares at $50 each
Your total value stays the same: $10,000.
Why companies do it:
Makes the stock price look more affordable
Encourages trading activity
Attracts more retail investors
Share splits often happen after a big rise in the stock price. Some famous examples of companies that did share splits: Nvidia, Tesla, Apple.
2. What Is a Reverse Split?
A reverse split does the opposite: it reduces the number of shares and increases the price per share.
Example: 1-for-10 Reverse Split
Before: 100 shares at $1
After: 10 shares at $10
Total value stays the same: $100.
Why companies do it:
To prevent delisting when the share price becomes too low
To improve the appearance of the stock price
Sometimes used by struggling companies
Reverse splits are generally seen as a negative signal but not always.
3. How Stock Splits Affect Options
Since we teach options (LINK), I will explain how a stock split affects Options as well.
When a stock splits, options get adjusted so that the contract continues to represent the same economic value.
For a Regular Forward Split (e.g., 2-for-1)
The following adjustments happen automatically:
a. Contracts multiply
1 option contract = 100 shares
After 2-for-1 split → the contract becomes 2 contracts, still controlling 100 shares each.
b. Strike price is halved
If your strike price was $100, after the split it becomes $50.
Net effect:
Your total exposure and value remain the same.
For Reverse Splits
Reverse splits create special “adjusted contracts”, sometimes called non-standard options, but these are rare.
Example: 1-for-10 reverse split
1 contract (100 shares) becomes a contract controlling 10 shares
Strike price is multiplied by 10
The contract may no longer represent “100 shares”
Liquidity drops
Bid–ask spreads widen
Reverse-split options are usually less attractive to trade.
4. What Doesn’t Change During a Split?
Whether forward or reverse, these stay the same:
The total value of your investment
The company’s market value
Your ownership percentage
The fundamentals of the business
A split is purely a cosmetic change.
5. Common Misconceptions
(A) “A split makes a stock cheaper so it must go up.”
Not true. A split can attract buyers psychologically, but it doesn’t improve the company’s profits.
(B) “My position doubled after the split!”
Yes, share count doubled, but value didn’t.
(C) “Option profits change because of the split.”
No, the contract is adjusted automatically to keep the math equal.
6. Why Splits Still Matter to Investors
Even though splits don’t change fundamentals, they can still create meaningful effects:
Positive potential signals
Management is confident
Stock price has been rising strongly
Improved liquidity
More retail participation
Potential red flags (for reverse splits)
Company trying to avoid delisting
Stock may be struggling financially
Can lead to continued decline afterwards
7. Netflix’s Upcoming 10-for-1 Split
Now lets look at a real example in chronological order:
On 30 October 2025, Netflix’s board approved a 10-for-1 forward stock split.
Record date: Close of trading on 10 Nov 2025.
Distribution of extra shares: After market close on 14 Nov 2025, shareholders will receive 9 new shares for every 1 share they hold.
Split-adjusted trading starts: On 17 Nov 2025, the stock begins trading with the new share count and price.
Based on pre-split share price (~USD $1,100), the new price could be around ~$110 per share post-split.
Illustration:
As of 10th November 2025, you own 1 share of NFLX (1 share= USD $1,100) as of 10th November 2025.
On 17th November 2025, your trading account would reflect the following:
10 shares of NFLX (1 share= USD $110), of total value USD $1,100.
Why Netflix’s Split Matters:
Even though the split does not change Netflix’s value or fundamentals, it could boost interest from retail investors.
Employees with stock options benefit: their option grants may become more “practical” to exercise when share price per unit is lower.
Psychologically, lower per-share prices tend to feel more accessible, especially for smaller investors.
All information here is for educational purposes only. This is not financial advice. Please do your own research and speak with a licensed advisor before making any investment decisions. Past performance is not indicative of future returns. How we invest may not suit your investment goals and risk management profile.
The pizza analogy is perfect for understanding this concept. What realy matters is how the option adjustments work automaticaly to presrve value. The Netflix example with a 10 for 1 split makes it much clearer how this plays out in practise. Companies often use forward splits as a psycological tool to attract more retail participation.
good knowledge post.