Nvidia Earnings Explained: What Investors Need to Know

Due to its dominance in the AI chip market, Nvidia is a major player in the stock market and enjoys the status of being the current standard for graphics processing units (GPUs) in training and running AI models. The demand for these AI chips has led to substantial revenue growth for the company, and they have experienced double and triple-digit increases multiple times in past business quarters.

A company like Nvidia that is a leader in their market, is known for an action called “stock splitting.” Stock splits are a corporate action where a company increases the number of outstanding shares by dividing the existing shares into new shares. This action does lower the price per share, but it doesn’t change the total value of the company.

Our guide will highlight the impact stock splits have on options trading and why traders need to pay attention, especially when dealing with Nvidia. We’ll address how an Nvidia stock split affects options contracts and trading strategies.

Understanding Stock Splits and Nvidia’s History

To get a firm grip on the idea of companies doing stock splitting and how that relates to Nvidia’s history, we’re going to highlight the primary reasons that stock splitting occurs in the first place, some of the most common stock split ratios you find businesses using, and how Nvidia has used stock splitting to great effect as they grow their market share and enjoy dominance in the AI chip market.

What Is a Stock Split?

A stock split is when a company divides its existing shares into more shares to make each one cheaper. For example, in a 2-for-1 stock split, every share becomes two shares, and the price is cut in half. This doesn’t change the total value of your investment — you just own more shares at a lower price. Companies do this to make their stock more affordable and easier for more people to buy.

Simple Example:

If a company announces a 2-for-1 stock split, every shareholder gets 2 shares for each 1 share they already own.

• If you had 1 share worth $100, after the split you’ll have 2 shares worth $50 each.
• Your total value stays $100.

Why do companies do stock splits?

Companies do stock splits mainly to make their share price more affordable and attractive to investors. When a stock price becomes very high, some small or new investors may feel it’s too expensive to buy even one share. By splitting the stock, the price per share goes down while the number of shares goes up—making it easier for more people to invest.

Here are few points:

1. To make shares more affordable for small and new investors.
2. To increase liquidity, making the stock easier to trade.
3. To attract more buyers, which can support long-term growth.
4. To keep the stock price in a comfortable trading range.
5. To show confidence that the company is performing well.

Common Stock Split Ratios 

Any stock split ratio is possible, but we’d like to direct your attention to the most common ones used in stock splitting with companies that offer stocks and stock options for trading online. Stock splits don’t change the total value of the total value of the trader’s investment, but the cost per share changes as the number of shares changes.

• 2-for-1— The trader gets two new shares for every one share held.
• 3-for-1— The trader gets three new shares for every one share held. 
• 4-for-1— The trader gets four new shares for every one share held.
• 3-for-2— The trader gets three new shares for every two shares held.

Something important to note is that companies can choose to reverse their stock splits in an attempt to reduce the number of shares and increase the stock price. It’s technically possible for this to happen with Nvidia, but we don’t see it happening any time soon.

Nvidia’s Stock Split History

Nvidia has a long history of splitting their stocks that goes back 25 years. There have been six notable instances of stock splitting, with the most recent one taking place on June 7, 2024, and the adjusted price taking effect three days later on June 10.

• June 2000—2:1 stock split
• September 2001—2:1 stock split
• April 2006—2:1 stock split
• September 2007—3:2 stock split
• July 2021—4:1 stock split
• June 2024—10:1 stock split

Historically speaking, Nvidia’s stock prices have gained two out of three times in the following three months after a stock split. To give you an idea of what this looks like, let’s examine how the Nvidia stock price acted following the most recent split on June 7, 2024. The time between the split and the adjusted price taking effect on June 10 saw the Nvidia stock soaring around 30%.  The stock price opened at $120 on June 10 and is now trading right around $123, which was an increase of more than 2%.

Strategies for Trading Nvidia Options Before and After a Stock Split

If you’re wondering about the best strategies to use before and after a Nvidia stock split,  keep reading, and we’ll cover the best moves you can make at each stage in the game to lock in the best profit possible. To keep things simple and easy to understand, we’ve divided the strategies into those you should use before the split and those that are best used after the stock split has been officialized.

Check out the best moves to make before the stock split occurs. These pre-split trading strategies ensure you go into a stock split prepared to secure a profit.

Pre-Split Trading Strategies

Buying Calls Before the Split

The basis for this strategy is centered on the idea of profiting from a potential price increase following the split. It’s betting on an increase in stock price due to excitement. It’s a bullish strategy that requires good timing—traders must buy shares before the ex-bonus date to receive the bonus shares.

Using Spreads to Manage Risk

Using a bull call spread can be a beneficial move for traders before a stock split sets in. A bull call spread involves buying a call option with a lower strike price and selling a call option with a higher strike price. Each one has the same expiration date and the idea is to profit from moderate price increases while also limiting potential losses.

Avoiding Overpriced IV

As there’s plenty of uncertainty in the market when traders are aware that a stock split is coming, there’s an increased demand for options which naturally leads to higher premiums (the price to enter the trade). It’s key for traders to get in as soon as they hear about the stock split to avoid paying the inflated premiums that come with higher demand for options.

Post-Split Trading Strategies

Traders can profit during the time following a stock split, and these are the best strategies for making it happen:

Taking Advantage of Lower-Priced Options

Stock splits result in increased access for new traders due to more options positions being available and lower stock prices. This is the key time for traders or investors to enter the market at a low price which increases their margin for increased profit.

Cash-Secured Puts for Lower Entry Points

Following a stock split, traders can use a cash-secured put strategy that works well with the new share price and quantity of shares out in the market. Selling puts could potentially result in buying shares at a discount. The adjustment that traders experience with the cash-secured put ensures that the value of the options contract remains the same before and after the split, preventing any sort of unintended gains or losses.

Watch for a Post-Split Pullback

A decline in price is known to happen after a stock split, though it’s not always guaranteed to happen. It’s caused by a wide range of factors including a price adjustment to reflect the new share structure and fundamentals, investor sentiment, the general market conditions, or an initial surge in investor interest which could wane.

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