Company options - basics

[Gordon]

Hi - just trying to get my head around company issued options - recently i have been researching this and i notice a few shares that have corresponding options that dont follow the shares price movements (or lag behind/in front by a few days).

Now i understand that all comapany issued options are put options (i think i have this idea sorted) and can be traded as you do normal shares (is that right?) What happens if you dont trade these options and keep them till expiry? do you HAVE to buy the shares at the option's price - what is the time frame if you want too - blah blah blah

im not asking anyone to write these answers down (unless you got some free time ) just point me in the right direction if you can. It seems when i research options i get bombarded with info for put and call thingies that have me a bit confused - where is the best place to start for info on company issued options.

The reason behind my interest in these is that i notice with a few shares that there will be an announcment (positive drilling results) the ordinary shares will go up 26% but the options (expiring when-ever) will remain unchanged (or will lag some-what behind).

Thanks for any help

 

[stoxclimber]

Now i understand that all comapany issued options are put options (i think i have this idea sorted)

No. Calls.

and can be traded as you do normal shares (is that right?)

Yes.

What happens if you dont trade these options and keep them till expiry? do you HAVE to buy the shares at the option's price - what is the time frame if you want too - blah blah blah

Must choose whether or not to exercise by the expiry of the options.

It seems when i research options i get bombarded with info for put and call thingies that have me a bit confused - where is the best place to start for info on company issued options.

Most of the options you will find info for aren't company listed options..although the same principles apply (except the no arbitrage pricing fr Aust is usually off since exercise isn't risk free..)

 

[Gordon]

Thanks a lot for the info - one more question

Where can i find info on company issued options (expire date and exercise price).

Also is there a site that links companies stocks with their respective issued options - for example i trade using commsec - yet would not know that GRK had options issued (called GRKOA) unless i read it somewhere else, and even knowing the code i still have no idea about expiry date or exercise price. I have also searched asx.com.au without any results.

 

[prawn_86]

not sure what the others use but i have found this site very handy -

http://www.tradingroom.com.au/apps/codeLookup.ac?returnUrl=/qt/quote.ac?code=

just make sure to double check with the company, ring them if you have to, cause i think i have noticed one or 2 errors occasionally

 

[motion]

Hi Guys

I have options in a company how do I convert them to shares ?

 

[stargazer]

Hi

If anyone could answer this as per MOTION. If you buy company options how do you exercise them.

eg. if you buy xyzo at .02c expires 2010 0.25c through commsec or e trade, and you wish to purchase the shares at 0.25c because they are in the money and shares are 0.90c. How do you go about converting the options to shares before the expiry.

If it goes against you and the expiry date arrives how does the transaction to have to exercise at 0.25c occur.

Cheers
SG

 

[reece55]

Hi

If anyone could answer this as per MOTION. If you buy company options how do you exercise them.

eg. if you buy xyzo at .02c expires 2010 0.25c through commsec or e trade, and you wish to purchase the shares at 0.25c because they are in the money and shares are 0.90c. How do you go about converting the options to shares before the expiry.

If it goes against you and the expiry date arrives how does the transaction to have to exercise at 0.25c occur.

Cheers
SG

If they are issued by the Company, then they should come with an exercise form. Send your cheque to the Company attention of their secretarial dept, they will bank the cheque, prepare and lodge an appendix 3b and instruct the registry to allot your shares.

I actually process these myself for some of our clients, although we have no listed shares......

Cheers

 

[stoxclimber]

Contact the company, they will send you the form.

 

[stargazer]

Thankyou all

cheers
SG

 

[Broadside]

If it goes against you and the expiry date arrives how does the transaction to have to exercise at 0.25c occur.

It's a call option - you have the right, not the obligation, to exercise these options...if the share price is below the option strike/exercise price at expiry, you are not obliged to pay up, you just don't bother exercising them. So, in a nutshell, when you buy a call option the most you can lose is the price of the option.

 

[stargazer]

Thanks Broadside i didn't know that. I learnt something Does that make them worthless after the expiry date.

Cheers
SG

 

[wayneL]

Thanks Broadside i didn't know that. I learnt something Does that make them worthless after the expiry date.

Cheers
SG

Yep,

The option ceases to exist after expiry.

 

[motion]

Hi

If anyone could answer this as per MOTION. If you buy company options how do you exercise them.

eg. if you buy xyzo at .02c expires 2010 0.25c through commsec or e trade, and you wish to purchase the shares at 0.25c because they are in the money and shares are 0.90c. How do you go about converting the options to shares before the expiry.

If it goes against you and the expiry date arrives how does the transaction to have to exercise at 0.25c occur.

Cheers
SG

Thanks everyone !

 

[stargazer]

Hi all

How does the option value worth change.

For example say you have company XYZ with a share price of 20c and the option XYZO is .07c. expire say 2010

You can buy more options at this price than shares and you are taking a risk thats understood.

Say in 2009 the share price goes to 80c due to some find etc What would the option XYZO be? Is there a calculation or relativity to working it out.

Cheers
SG

 

[prawn_86]

For example say you have company XYZ with a share price of 20c and the option XYZO is .07c. expire say 2010

Say in 2009 the share price goes to 80c due to some find etc What would the option XYZO be? Is there a calculation or relativity to working it out.

SG

im pretty new to options myself so anyone can feel free to correct me:

if the sp went to 80c then the option would be valued at around 60c possibly a bit below accounting for time value of moeny. this is because you purchase the option for 60c you still have to pay another 20c to convert the option which totals up to the 80c thats the heads are selling for. (this is presuming an option exercise price of 20c which i think is what you meant)

 

[Broadside]

im pretty new to options myself so anyone can feel free to correct me:

if the sp went to 80c then the option would be valued at around 60c possibly a bit below accounting for time value of moeny. this is because you purchase the option for 60c you still have to pay another 20c to convert the option which totals up to the 80c thats the heads are selling for. (this is presuming an option exercise price of 20c which i think is what you meant)

the options should (theoretically) trade at a slight premium to the instrinsic value of 60c (again, assuming strike price is meant to be 20c) - - in the real world company issued options do sometimes trade below intrinsic values. The premium to intrinsic value is a function of the time left to expiry and how volatile the underlying share is. If the share is highly volatile the option is worth more, likewise the longer the time to expiry. There is an options valuation model, Black-Scholes. It's an interesting area, options can be risky when they are used to leverage an investment but can also be used to reduce risk...getting complicated to explain but it's worth investigating further if you're interested.

The bigger stocks are traded on the options exchange, you can buy and sell both call and put options, gives a great deal of flexibility to increase exposure, protect against falls, etc etc.

 

[stargazer]

Hi

Yes sorry i also meant the exercise price at 20c.

I was purely looking at company options.

So as this example cost of option .07 exercise 20c at any time.

Value of share in 2009 is 80c .

So this risk is .07c x the amount purchased which is total risk if if goes against you.

if the option goes to 0.60c its a nice profit.

At this point would you exercise and convert to share at 20c Hold as is or Sell part or all

Is liquidity an issue with these company options?

Cheers
SG

 

[Broadside]

At this point would you exercise and convert to share at 20c Hold as is or Sell part or all

Is liquidity an issue with these company options?

Cheers
SG

It's up to you: if you want to just lock in a profit you can simply sell the options - no need to convert them. If you want to stick with the company you can send a cheque to the registry and convert them. It really depends on the situation. Liquidity is usually lower, again, it depends.

They're a useful tool to get more leverage to a company, or alternatively get exposure to share price upside without outlaying as much cash. But the leverage depends on how high the strike (or exercise) price is.

If the ordinaries are say 20c and the strike price is 30c, they have no intrinsic value so the options could be very cheap.....and unless the ordinary shares move above 30c before expiry, the options will expire worthless.

But if the shares are $1 and the strike price is 20c, they will trade around 80c or so and closely track the movement in price of the ordinary shares. Because they are so far "in the money" the risk is lower, but you don't get as much leverage either. It's risk/reward.

I may not be explaining this too well, option valuation is a field in itself and derivative gurus are probably rolling their eyes at my explanation.

 

[stargazer]

Hi Broadside

Thanks for that i sort of understand what you are saying.

Cheers
SG

 

[So_Cynical]

not sure what the others use but i have found this site very handy -

http://www.tradingroom.com.au/apps/codeLookup.ac?returnUrl=/qt/quote.ac?code=

Prawn is there a way to make it search for only company options...it seems the filters don't work to good, im getting ETO's etc...when what i want is like part paid and company issued call options etc.

Anyone know of another site with a more detailed search?