Fraser JC - I'm having difficulty following the logic in your formula but would make the following observations:
1. I don't know the potential upside - no-one does. I've only looked at the range over the last 12 months and adjusted it for dilution.
2. The neat thing about buying options is the most you can lose is the premium (in this case 5 cents per option) and the potential upside is a lot higher than that - particularly the longer the term of the option. Anything could happen in the next 2 years - but the most you'll lose is 5 cents per option.
3. The return should be calculated on the initial cost of the investment which is 5 cents per option. The option gives you the right but not the obligation to buy a share at 80 cents. If you decide to exercise the option and buy the share you can immediately sell the share and realise the difference between the buy pice and sell price. I mentioned earlier that in practice that can be difficult due to timing however there may be ways to manage the timing mismatch.
4. I think you're point is that there is no intrinsic value (ie. the difference between the strike price and the market price) and the 5 cent premium only represents time value. I agree with that and given the share's historical price range, I thought a 5 cent premium for the shares to be above 80 cents anytime up to 2 years into the future seems attractive. I accept that the first 5 cents above 80 cents is just recovering the premium and the rest is net profit. The 5 cent premium is a sunk cost - just like an insurance premium.
5. You've mentioned that in your opinion the option is almost surely "worth nothing". Given that you're only paying 5 cents for it - I think you're about right. 5 cents when considered against the historical volatility of this share is about "nothing".
It will be interesting to see how this one plays out.
"I wondered why the frisbee was getting bigger - then it hit me."
CPH Price at posting:
63.0¢ Sentiment: Buy Disclosure: Not Held
