3 Great Ways to Play Splits:

3 Great Ways to Play Splits:

There are actually five ways to play stocks that are splitting, but we wanted to highlight the three most profitable ways for you. They are not necessarily good for day trading, but often daytraders will veer off course a little and make some hansome profits playing stock splits. You should consider doing it also. Now here are the three ways we like to play splitters:

AFTER THE SPLIT ANNOUNCEMENT
Often times, the stock will develop a pattern of dropping back three to ten days after the announcement. This provides you with an opportunity to take advantage of the split announcement. If you are playing calls this is when you buy what they call “ dipping undervalued calls “. Many times you will have 2-4 chances to make this play before the stock actually splits. Just make sure you carefully observe the chart patterns to confirm that the stock is pulling back and that there is a turn back to the upside. Establish your exit points by looking at the prior highs.

PAY DATE
Historically, this play has very high odds of success and profit. If you are playing options, this play has you buying the stock or option the day before the split. Pay careful attention to the stock pattern during the week of the stock split pay date. Hopefully, you should be observing an upward pattern or at least a sideways channeling. Your best odds are to hold the option throught the split ( note: you will now have twice as many options since they also split ). Sell your options within 2-3 days of the split, your odds are better if you purchase the closest month of the “ out-of-the-money “ call.

And please remember that there will always be other plays, so if the stock is tanking one or two days before the pay day, don’t play it! Wait for the next one to come along that meets these guidelines.

POST SPLIT PLAY
Usually, the leaders in their industry group, such as Dell Computer, Intel and Microsoft, those companies that we the general public and trading institutions most easily recognize, have a greater chance of moving upward than those that do not split.

Here again, observe the charts for a long dip and profit taking before you buy long term “in-the-money” options. If you already own the stocks you can write ( sell ) “out-of-the-money“ calls to collect premiums and have good odds of being “called out“ with a nice capital gain.

Now suppose your stock gets upgraded as it is going into a split, how to you play that?
Well, upgrades react very much like split announcements in their pattern of behavior. Generally on the day of the upgrade they soar. This MIGHT last into the next day, and then they pullback on profit taking. After a few days of consolidation, and if some fund money starts to show up, they begin climbing and can go for quite a few points. Use this concept after they have started heading back up and you can capture some nice plays!

Use only upgrades and initiates from the major institutions. They are the ones that carry the most weight when they upgrade a stock.

Subscribe to the Stocks2Watch Newsletter now to receive tips, tricks and techniques for trading.
Just send a blank email to: stocks2watch@sendfree.com