# NCM option query



## RichardE (18 September 2007)

Good Evening All,

I was hoping someone might be able to clarify this for me.

I am endeavoring to learn a thing or two about how options work. I have been tracking some option prices for charts I thought looked interesting. One such chart was NCM at the close on Sept 7. I decided to track NCMB9 a 2600 call with 27/9 and NCMBM a 2500 call with expiry 27/9. I reckon perhaps I could have bought both on Sept 10 for around 0.345 and 0.675 respectively (this is based on course of sale information that day). The next day NCM went into a trading halt as it sought to raise funds. 

When NCM came back on board yesterday the strike prices had been adjusted for NCMBM to 2311 and NCMB9 to 2404. Today NCMBM had a last sale at 3.20 and NCMB9 at 2.46. Have I missed something in thinking that had I actually bought say 1,000 options of each my 1,000 parcel of options would be that much in the money?

I presume that the changed strike price reflects the new shares NCM issued. If anyone could explain this to me and confirm (or blow apart) the above open profit assumption I would be most grateful.

Cheers

Richard.


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## sails (18 September 2007)

Hi Richard,

When the strike price on an option is adjusted as in the case of NCM, it usually means that the number of shares per contract (SPC) have also been altered.  In this case NCM options now have 1082 shares per contract and the change in strike price multiplied together with the new SPC should equal the previous, unadjusted strike price.  Same thing with the new price - just multiply that by 1082 instead of 1000 for the unadjusted SPC and they should be the same (give or take any market movement for the day).

So, sorry - no free trade!  If ever you are looking for adjustment info, here is the ASX web page to check it out.  You will find the recent NCM adjustment listed there. http://www.asx.com.au/investor/options/notices/adjustments/2007.htm

Cheers.


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## RichardE (19 September 2007)

Hi Sails - thanks for the reply and the link too, I had yet to find that page.

So to make sure I have it right if I had bought 1 NCMBM option contract at 0.675 it is now an option to buy 1082 NCM shares at  23.11 rather than 1000 at 25.00. I can understand that. I think the bit I was missing was that if nothing else changed the price of NCM should drop by the same amount the strike price was reduced, hence the option price would have been effectively the same as the day prior to the adjustment. In this case the price of NCM rose when the trading halt was lifted and so NCMBM is now considerably in the money. I think that reasoning is right, please correct me if I am wrong anyone!

Cheers,

Richard.


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## sails (19 September 2007)

Hi Richard - yes, you're getting the idea!  

LOL, I hadn't looked at a chart when typing my first reply, so yes, that long call is now ITM and technically should be making exactly the same profit (or loss) as the unadjusted option due to the change in SPC.

Does that help?


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## RichardE (19 September 2007)

Yes terrific thanks Sails

With NCM up a further 1.76 today I am kinda wishing I had bought a contract or two! Still at least I have learned something along the way.

Cheers

Richard.


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