Hello all,
I thought that the recent surge of apparent new interest in WML and the current direction of the company provided a good juncture to review the current listed WMLOB and WMLOC options (given their close expiry date and high strike price, I have not considered the WMLOA options here).
From the outset I wish to reiterate that this is not to be relied on as advice in any form, but rather is for discussion purposes only and is highly speculative and theoretical. Hopefully it simply encourages people to undertake their own research and consider their own circumstances (including risk tolerance). Please consult with your financial / investment adviser and accountant for advice if required.
WMLOB options expire on 30 June 2023 and have a strike price of $0.03.
WMLOC options expire on 31 May 2024 and have a strike price of $0.035.
Per the 31 May 2021 announcement, WML presently has circa 499.7 million shares on issue, with 88.4 million WMLOB and 79.8 million WMLOC:
This tells me at present that both the WMLOB and WMLOC have been accumulated or are otherwise tightly held, because supply on market has been rather limited. Personally I have a "foot in each camp" with a 50:50 blend of WMLOB and WMLOC, in addition to some WML shares.
I do not propose to give an outline of "options 101" but note that: (a) the exercise of an option by paying the strike price to WML before the expiry date will entitle the holder to an ordinary share in WML; (b) both types of options are currently "out of the money" because WML's current share price ($0.023 at the time of writing) is below the strike price of the option; (c) WMLOB will be "at the money" if the share price hits $0.03, and "in the money" anywhere above that price; (d) WMLOC will be "at the money" if the share price hits $0.035 and again "in the money" anywhere above that price; and (e) holding options rather than shares means you do not have the voting rights that attach to ordinary shares and can miss out on things such as participation in rights issues (e.g the most recent SPP when the WMLOC were issued).
Based on WML's present shares on issue, WMLOB will be in the money if the company obtains a market capitalisation of circa $15.5 million and WMLOC will be in the money at a market cap of circa $18 million. Further dilution will obviously impact on this assessment, however, as you can see both options are currently within striking distance (no pun intended - and each is a long way from expiry) which is encouraging from my perspective.
In essence, options indeed can provide you a variety of "options" for the future. For example, you can seek to trade the option itself as a stand alone asset, or you can seek to acquire the options effectively as a "lay buy" of WML shares in the future (meaning you can apply your resources elsewhere prior to exercise), or a mix of both (and you should take careful note of the considerations and ramifications of each in terms of potential CGT treatment). In the case of the former, if WML's market capitalisation and share price appreciates materially and in a sustained manner (e.g the company has material exploration success) then the options could prove to be very profitable in their own right. In either case, however, if the company fails to deliver, there is significant further dilution, macro and market conditions are unfavourable, and so on and so forth, then the options could prove to be a very risky investment indeed.
The Black Scholes model provides a methodology for calculating the "premium" on call options:
https://www.investopedia.com/terms/b/blackscholes.aspYou can run your own calculations and there are various online Black Scholes calculators that can be used for this (e.g: http://www.deltaquants.com/calc-test). By way of a rough analysis (NB: this is not intended to be a spot on approach, but simply for illustrate purposes) you arrive at a current premium on the options in the region of $0.003 - plus a few decimals - on the bases of the following:
Share price: $0.023
Strike price: $0.03 (WMLOB) or $0.035 (WMLOC)
Time to expiry: circa 2 years (WMLOB) or circa 3 years (WMLOC).
Volatility: 40% - arbitrary figure, I have not gone and calculated the annualised volatility for WML.
Risk-free rate of return: 0.02% (Aus Government 2 year bond for WMLOB) or 0.61% (Aus Government 5 year bond for WMLOC) - I have not factored inflation.
You can then apply this to look at hypothetical investments in WML shares versus WMLOB or WMLOC based on current trading prices (WML last traded $0.023, WMLOB at $0.014, WMLOC at $0.013).
- $1,000 invested @ $0.023 = 43,478 WML shares.
- $1,000 invested @ $0.014 = 71,428 WMLOB.
- $1,000 invested @ 0.013 = 76,923 WMLOC.
Let us say that WML moves to a market cap of $75 million. Based on the current shares on issue the share price will be $0.15, and applying the theoretical approach to the options values (factoring in strike price and premium estimated above):
- The $1,000 invested in WML shares will be valued at $6,522.
- The $1,000 invested in WMLOB will be valued at $8,787.
- The $1,000 invested in WMLOC will be valued at $9,099.
This is 5.52 bags for WML shares vs 7.78 bags for WMLOB options vs 8.09 bags for WMLOC options This
hypothetical calculation illustrates the potentially substantial leverage that options may provide.
Bearing in mind that WML has recently been trading above $0.023 (indeed the VWAP in the last trading session was $0.024 I think) the potential differential based on the above calculations would obviously be even more favourable with the higher share price. However, the
actual trading of WMLOB and WMLOC may not follow the theoretical modelling at all, and we can already see that liquidity may be a genuine factor that increases the inherent risk of investing in options (particularly approaching the expiry dates and depending on whether the options are in or out of the money). While options can re-rate upwards more significantly with the increase in the price of the head shares, the flip-side also usually applies, which is the price of the options can be punished if the share price decreases.
Final point, I suspect that some of our directors may also have a view about the potential of the options, noting their recent trading activity - such as David Lindh who recently acquired (via his associated entity) approximately 1.4 million WMLOC @ $0.01 and 263k WMLOB @ $0.01 per the 30 June 2021 Appendix 3Y:
Again, the above represents my personal commentary only, please do your own research and make your own investment decisions. Very best wishes to all.
