About to blow?, page-137

As posters have mentioned, in general options provide a certain degree of leverage, and with that brings both greater returns on the upside and greater risks on the downside that investors should consider. Option holders hold the right to convert their options into ordinary shares of the company on or before the expiry date, provided that the share price of the underlying stock is at or above the exercise or strike price of the option.

For HAS options (HASO) which have an exercise price of 25c and an expiry date in April 2022, the leverage play is currently very high. This is because the fixed exercise price of 25c takes up a large portion of the intrinsic price of the option i.e. 25c / (25c + 3.6c) = approx. 90%. This means that on any rerate of the HAS SP, the HASO trading price have to play 'catch up'. Note for simplicity this does not consider volatility etc that would be accounted for in a Black-Scholes options pricing model.

I've graphed this out to help people visualise the leverage effect that could come into play.



As shown above, the returns on HASO are magnified relative to HAS, for any given HAS SP target above what HAS shares are trading at currently. Because HASO are almost 'in the money' (i.e. able to be converted into shares once the HAS SP hits 25c or above), going forward we would expect the intrinsic price of HASO to be at least on par or trading at a premium to HAS, which is the case currently.

For example, if HAS SP was to reach 40c, then the trading price of HASO at par could be 15c (i.e. 40c HAS SP less 25c exercise price of HASO), providing investors with a 300% return on HASO at the current HASO trading price of 3.6c, relative to an 80% return on HAS at the current HAS trading price of 22c. Further leverage comes into play with greater appreciation of the HAS SP beyond the HASO exercise price, as the HASO trading price would need to catch up and multiply further so that the options continue to be valued as if they were shares (otherwise there would be an arbitrage scenario).

Conversely on the downside, if the HAS SP fails to reach 25c or greater on or before the expiry date of the options (April 2022), then the HASO expire out of the money and investors risk losing their entire investment at whatever they bought the options for. If holders expect HAS shares to appreciate over the next year, particularly in light of pending project milestones due to be announced in Q1 and Q2 of CY21 (further offtakes, finalisation of funding, FID, improved project economics), then HASO could provide some solid leveraged returns.

DYOR, this is not investment advice, and would love to hear thoughts from others.

Cheers,
L