dangar,
It's called leveraging ... based on LOM at 36 cents and LOMOA at 23 cents, you can buy 50% more (volume) LOMOA at 23 cents for the same amount of funds.
If both LOM & LOMOA then increase equally cent for cent, you are making 50% more profit than you would have, had you purchased the LOM shares. You are in essence getting an interest free loan;
Downside of buying LOMOA are:
- LOMOA are very illiquid and hence impossible to sell easier (if urgent sale is required);
- LOMOA option holders will not participate in LOM share capital raising (which also hold down LOM share price) and hence may get diluted).
- as you get closer to expiry date ... LOMOA will not increase cent for cent to LOM (as buyers will not pay as high a premium ... they would simply buy LOM directly, as 20 cent option exercise would be payable soon anyway);
- if LOM share price drops below 20 cents (albeit unlikely) at September 2017, you options will be worthless, not worth exercising and you will have lost all the money invested in LOMOA.
If you have faith in LOM and BOD (like myself) and would not need to sell LOMOA in the near future, then LOMOA may be worth the additional risk. Obviously depends on your personal risk propensity and future outlook of LOM's success.
P.S.- I am fully loaded up in LOMOA shares as well as holding LOM shares.
Good luck,
Zippy1
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