oppies... what are they?, page-2

Heath,

Oppies are Options. They are the option to buy a share. They have a Strike Price and and expiry date.

For example, KDR and KDRO.

KDR is the stock code. KDRO is the option code.

KDRO is the option to buy KDR stock at 20c, sometime before the Nov 2013 expiry date. So, sometime before expiry, I can fill in a form, send in a cheque and "convert" my KDRO into KDR stock (on a 1 for 1 basis).

Because you have to pay 20c to convert the stock, it usually trades 20c below the price of the stock.

The trick comes when you need to assign a value to potential upside and time value.

If KDR was trading at 20c, would KDRO be worth 0c? Well, no, because the "Potential" of KDR increasing above the current 20c is worth something. The longer till expiry, the more the "potential" is worth.

If the options expired in a few days, the time value would be worth very little. If they expired in a few years, the value is worth much more.

Think of it like an option to buy your house. Your house is worth $500,000. You give me an option to buy your house this week for $600,000. Clearly the chance of your house going up $100,000 in a week is almost nil, so maybe that option is only worth $5.

But lets say you give me the option to buy your house for $600,000 in 10 years time. What would that be worth. If your house was worth $1M in 10 years time, then the option would be worth $400,000 to me in 10 years time. I might be willing to pay you $100,000 today for that option based on the chance that your house will be worth much more than $600,000 in 10 years time.

I hope that explaination helps.