Ann: Share Purchase Plan Oversubscribed, page-164

Normally you buy the option paying an option premium (ie. you buy the right to buy the share at an exercise/strike price)

So I could buy the option for say 5c. I have bought the right to buy the share at 20c (exercise/strike price). So if the share is trading at 48c, I can exercise my option to buy at 20c (exercise/strike price). I have bought a share worth 48c for 20c (ie. benefit 48c less 20c paid = 28c benefit) but the original option premium paid for this right to buy at 20c was 5c therefore I have profited (48c less 20c exercise price less 5c = 23c profit). With IVZ the options have been given out ‘free’ ie. didn’t pay the 5c option premium in this example. The above is an example of a LONG CALL OPTION.

These options are traded on market so if I don’t want to exercise I can sell them. The higher the share price the higher the option will trade on market. Will pay more for options where the share is trading well ‘in the money’ knowing I can exercise the option for 20c (ie. pay exercise price of 20c for the share ‘exercise the option’).

Hope this helps.

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Also get SHORT CALL OPTIONS (similar thinking taking the opposite position ie. Seller of call options).

LONG PUT OPTIONS and SHORT PUT OPTIONS (with long Put options taking advantage of share price declines and short Put options taking opposite position ie. seller of Put options)