Ann: Loyalty and Piggyback Options Program, page-380

"with the leverage play i could sell 100k PAR for $50,000 (at 50c) and at say 18c buy 280,000 PAROA... if we get a deal and went to say $1.50 then they're now roughly sitting on 280,000 x 1.18 (if we stay with the 32c differential between PAR and PAROA as with 50c and 18c). PAR would have given me $150k, PAROA at $1.175 is giving me $330k.... yes in 12 months you have to make a choice on exercising or selling.... but, you've had the ability to more than double your portfolio...holding value of PAR with PAROAuy 280,000 PAROA... if we get a deal and went to say $1.50"

Not quite. You might want to check your maths and how options are valued at expiry (the PAR/PAROA diff is very dynamic with time and stock price).

If at a years time in your scenario at $1.50, the $0.65 call options have an intrinsic value of $0.85 ($1.50 - $0.65) if we presumptively assume you exercise 280,000 calls at $0.65 and sell the 280,000 stock at $1.50 for a ($0.85 x 280,000) $238,000 final value on the $50,400 you out-layed on options originally (i.e. a $188,000 gain which also adds up to 280,000 x [$1.50 - 0.83] your effective exercise price considering premium paid - don't also forget you also have to lay out $182,000 (280,000 x $0.65) to buy the stock resulting from your exercise! Indeed the leverage advantages of options vs buying $50,000 worth of stock, which you'd have only made a $100,000 gain (one final $150K value) are enticing at $188,000, but not without risk or expense to achieve.

Now in efficient markets (the whole notion of B&S pricing of options) there is always a price to such leveraged gains from options. Risk. All sorts of risks if you understand the 'greeks' in options.

What if PAR announces a crap royalty deal none of us investors particularly like. What if PAR is trading $0.64 in a years time? Your $0.65 options are worth diddly squat (yes the piggy back options retain some minute time value). Your options have no intrinsic value and the extrinsic value ($50,000) has decayed away to zip (welcome to theta risk in options). Whereas your stock you might have bought instead would at least still be worth $$64,000 for a $14,000 gain (vs your $50,000 complete loss on options).

Come on Oxxa, you are making it sound like a no brainer, that we should all sell stock and buy options. Less informed investors unfamiliar with options could be lead astray by your example. Understand the risks of the assets you buy, stock or options, or probably best not to buy.

If we ignore the piggy backs, even if the stock is trading in a year's time $0.78 cents. If you stuck with the stock you'd have out-layed $50K for $78,000 value and a $28,000 gain. In the options you'd have paid $0.18 on 280,000 options that were now worth $0.13 intrinsically. That is $36,400 in final value for a $14,000 loss (vs what would have been a $28,000 gain in stock for the same capital outlay).

In your scenario, the stock has to be trading > $0.82 cents in a years time for your options outcome, under your scenario, just to at least break even, ignoring exercise expenses; ($0.83-$0.65 x 280K) = $55.400 options value (vs what would have been a $33,000 gain on stock).

To just match the gain in stock, using your scenario, and the risk profile to get there a very different risk proposition to holding stock, the stock would have to be trading $1.01 for holding options to be even equal in terms of financial return to holding stock for the same capital outlay.

(I am happy to run you through the math - this is not financial advice, blah, blah, blah)