Reverse Split Affects Positions

Yesterday, I received an email from my broker:

As a result of these splits, my EDC and FAS positions were reduced to 40 and 60 shares respectively. Or at least, that is what the positions should be…the adjusted number of shares haven’t shown up in my holdings yet(!), so I only have EDC currently. Since my options on FAS expire tomorrow, I’m not TOO worried.

On the downside, the reverse split has introduced extra risk into my account. I cannot sell either security online until the official paperwork is received by my broker. A phoned in order is the only trade that can be executed. If there is a large, downward move in either security, I can’t do much about it.

You may be asking yourself why I don’t increase my position sizes to 100 shares and sell new covered calls. Good question.

According to the CBOE:

Pursuant to OCC rules (Article VI, Section 11 and 11A), all outstanding EDC/FAS option series as of Thursday, November 10, 2011, at 8:30 A.M. Chicago time will be adjusted to reflect this 1-for-5 reverse ETF split. All EDC/FAS options will be adjusted to require the receipt or delivery of: 20 shares of the new securities (New “EDC”/”FAS”).

– AND –

Strike prices will remain the same. The option symbol will change to EDC1/FAS1.

Confused? I was too.

Basically, this means that the converted options (EDC1/FAS1) are based on 20 shares (rather than 100). So the calls in my account have changed…sort of. 1 “FAS1” call is a contract for 20 shares of “new FAS” with a strike price of $70.00. In my account, I hold 1 FAS1 call with a strike price of $14.00 (or 1/5 of $70.00).

You can check out the official statement from Direxion here:
Reverse Split Q&A (PDF)

And here is the CBOE press release:
Direxion Daily Emerging Markets Bull 3x Shares 1-for-5 Reverse ETF Split (PDF)


About T. Knight
Blogging about my journey to financial independence via investing for cashflow.

2 Responses to Reverse Split Affects Positions

  1. Malcom Beil says:

    Nice site.

  2. I just had to che1ck in with you and leave a comment…which is not something I often do! I enjoy reading posts that make people think. Also, thanks for allowing comments!

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: