Seafarms Options SFGO

Seafarms Options – SFGO

Last week a poster (Jay C) enquired about the exercise price of SFGO, Seafarms quoted (ie tradeable) option. The enquiry jogged my mind about this security, since it tends to be quite low profile – most investors tend to buy shares SFG, and don't consider buying SFGO, but I thought it might be worthwhile to mention it for those who have a bullish view of Seafarms share price over the following 12 months, and similar to me have forgotten about its potential.

SFGO has an exercise price of 9.7 cents, any time up until its expiry due July 2021 ie you can convert the SFGO into fully paid shares prior to its expiry date of July 2021 by paying the exercise price, of 9.7 cents per share. So why would you do that, when you can buy SFG now on market for less than 9.7 cents?

Effectively, when you own SFGO you are “locked in” to that conversion price. Thus if SFG were to trade at say 12 cents, then if you wanted to convert the SFGO you held, then you can do so by paying 9.7 cents (paid directly to the company), not 12 cents.

By paying directly to the company then you also don't pay any brokerage fee for the conversion, and furthermore the company benefits by receiving funds for its ongoing activities.

If SFGO are “in the money”, ie above 9.7 cents at the time of expiry then most options will be converted by option holders – thus this will be a valuable source of funds for SFG, which it can use for ongoing activities, or to pay down debt.

If you wonder what the real benefit is with SFGO, then consider this scenario, which I personally believe is very likely:
SFG announces its BIG funding arrangement, that effectively puts in place funding arrangements for Project Sea Dragon. In that event the share price is likely to shoot up appreciably. Who knows how high, and then possibly will fall away somewhat, but as time towards first prawns its likely to move appreciably higher.

But just consider that first move on the BIG announcement. Some commentators have suggested 30 cents. Lets be more conservative, and assume 20 cents.If you buy shares at the moment, it will cost you 6.0 cents plus brokerage. If you buy an equivalent number of options it will cost you anywhere between 1.2 cents and 1.6 cents. Lets assume 1.5 cents (last sale price - but currently on Offer is 1.6 cents).

If the share price were to jump to 20 cents because of the BIG announcement, then your profit on shares purchased at 6.0 cents, is 14.0 cents ie 233%.If we are very conservative, and ignore the time value of the option (which the market currently considers it to be 1.5 cents), then an option SFGO is valued at 20 – 9.7 cents = 10.3 cents, say 10 cents. Ie for an option you bought at 1.5 cents, the SFGO price is 10 cents, ie a profit of 8.5 cents = 566%!

So it becomes very clear, that purchasing an equivalent number of options gives you considerable gearing to any major move above a price of say 9.7 cents. In actual fact I've been very conservative with this case, because the “time value” of the option, currently 1.5 cents (for conservatism I've ignored in the example above) is on the low side because:
1. The option is currently “out of the money” ie below the exercise price, and
2. The price volatility of SFG has been low recently (“beta value”).

At a time (like now) where there is a good possibility of the share price going upwards rapidly (in the event the BIG funding is announced) then the option, SFGO, is actually a good alternative security to consider. But noting that it has:
1. Less trading liquidity, and
2. An expiry date of July next year.

The trading liquidity is very likely to be less of a problem if the share price of SFG moves appreciably above 9.7 cents.

As a disclaimer I hold SFGO – anyone who participated in a rights issue a couple of years ago (I don't recall exactly when) were granted options on the basis of 1 free option for 2 shares purchased.