Australian (ASX) Stock Market Forum

RIO Rights Issue - Options Trade

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NAT88S

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4 May 2009
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Hey Guys,

Im sure you've all heard about RIO's Rights Issue which goes ex rights on 17 June 09.

Shareholders can subscribe for 21 shares for every 40 @ $28.29.

Using RIO's price at time of writing ($77.60), in theory RIO should be trading @ $60.62 cum rights.

So Im considering buying a put option, similar to this:

Expiry: 25 June 09
Exercise Price: $79.00
Last Traded Price Today: $4.600

Now I know theory and reality are two different things, but the rights issue is going to dilute the current shares quite alot and I would have thought have a material impact on the share price.

This should be priced into the option price though right?

Using the above prices RIO only needs to drop to $74.40 cum rights for the trade to break even, alot higher than the theoretical price of $60.62.

I have never traded an option in real life before, but I am studying them in 3rd year uni.

Does anyone have any opinions on this trade?
 
TERP (Theoretical ex rights price) for RIO is around $58 at current levels.

The Option Strike price will adjust accordingly when RIO goes ex-rights.
ie. It may be adjusted to a $59 or so put option. Worth pretty much the same minus time decay.
 
Really? instead of the market pricing in the expected price movement, the exercise price of the option is adjusted?

Guess there would be no point to this trade then
 
Just found the ASX announcement. They adjust the exercise price and the contract price after the ex rights date, what a let down lol
 
After the big price gap today to $58, I tried to place a call 70 strike option order, thinking that in the long run RIO will catch up back to to 70ish price.

Luckily my broker called me (excellent service!) to educate me more about the implications of ex-rights changing the option strike prices(recalculation figures later to be released on ASX).

I told him to cancel the order. Yes it was a let down for me too, and relief at the same time.
 
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