Indicators
Monday, June 8th 2020
Stock Splits Treatment In ORATS Options Data And Backtesting
Stock splits have implications for options holders. In backtesting, ORATS trades out of pre-split names the day before and re-enters the day after a split.
Summary
Stock splits and large dividends can have implications for options holders, who receive adjusted shares per contract or strike price to mitigate the effects of the split. ORATS handles corporate actions in backtesting by simulating exiting the option the day before and re-entering the day after with a new opening scan. ORATS data only shows standard contracts and splits for a symbol can be obtained through their data API.
Companies and ETFs may decide to have a stock split or to declare a large dividend (>10% of the stock price) if the stock price goes up or falls precipitously to encourage more trading interest in the shares.
Options holders get their options shares per contract or strike price adjusted to be similar to pre-split specifications in order to not be positively or negatively affected by the split or large dividend. This is done by the Options Clearing Corporation. There are fields in the Options Price Reporting Authority (OPRA) feed disseminated to brokers and other options front ends to reflect the new shares per contract or strike price for the pre-split options.
Add adjustments for mergers to these split and dividend adjustments, and the treatment of pre-split options gets onerous for options information providers. These splits, dividends and mergers are termed corporate actions.
At ORATS, we handle corporate actions in the simplest way possible that still can be performed in actual trading. For example in backtesting, when the date for the corporate action is known, we simulate exiting the option the day before and re-enter the day after with a new opening scan. In our data, we only show the standard contracts, filtering out non-standard strikes that have a different multiplier than the standard 100 shares per contract.
VXX is a stock that performs reverse splits. While regular 2 for 1 splits will have a divisor of 2.0, a reverse split of 1 for 4 will have a divisor of 0.25.
Here's how to call our data API to get the splits for a symbol:https://docs.orats.io/datav2-api-guide/definitions.html#stock-split-history
Here are trades in VXX. Notice how the split date of 11/9/2010 is avoided:
Disclaimer:
The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors.
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Be sure to read the OCCs Characteristics and Risks of Standardized Options to learn more about options trading.
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