Thoughts on a potential short term trade next week

[pedalofogus]

Hi guys.

I have found what I think is a good trade that I plan to execute next week, but just wanted to bounce the idea off the knowledgeable ASF folk, and would love feedback from you guys on the validity of the idea or gaps in my thinking. In particular, although I have a fair bit of experience trading shares, I don't have much experience in trading options or valuing them.

So the company is one I watch and own, Altura Mining. They have two securities, AJM and then some options AJMOA which expire in August 2011 exercise price 15c. The options finished on Friday at 6c, so to buy them and exercise them would be a total of 21c. But the ordinary shares are trading at 22c, so options are 1c cheaper than the shares, and no time value is being prescribed. How would you go about valuing the time value? If they are undervalued, surely they will catch up shortly?

My other idea was to sell my shares at 22 next week, buy the same amount of options at 6, and bank the rest until exercise in August.

Any thoughts appreciated.

 

[skyQuake]

Hi guys.

I have found what I think is a good trade that I plan to execute next week, but just wanted to bounce the idea off the knowledgeable ASF folk, and would love feedback from you guys on the validity of the idea or gaps in my thinking. In particular, although I have a fair bit of experience trading shares, I don't have much experience in trading options or valuing them.

So the company is one I watch and own, Altura Mining. They have two securities, AJM and then some options AJMOA which expire in August 2011 exercise price 15c. The options finished on Friday at 6c, so to buy them and exercise them would be a total of 21c. But the ordinary shares are trading at 22c, so options are 1c cheaper than the shares, and no time value is being prescribed. How would you go about valuing the time value? If they are undervalued, surely they will catch up shortly?

My other idea was to sell my shares at 22 next week, buy the same amount of options at 6, and bank the rest until exercise in August.

Any thoughts appreciated.

You'll find in the company oppies world, they will generally trade at a disc to even intrinsic after a share has rallied heaps.
Its the oppie holders' expectations that the stock will fade.

The catchup scenario is more likely to be share falling than oppie catching up. You must consider where the stock will be in 2 weeks time. Buying oppie today t+3, then you ask the registry to convert, they ask the company to convert etc/ takes 1~3 weeks. So your 1c discount could turn very sour in the 2 weeks timeframe.

Selling ur stock and buying up the oppies is a good strategy though - as long as the discount covers transaction costs. Effectively reducing ur cost base.