While I think your option theory is interesting, it is unlikely many of the option holders will exercise their options just because they are ITM.
When the SP goes above 3c, the MC remains the same (until an option is exercised), the fully diluted MC will increase as you mentioned, but with the options expiring 17 months from now the chance 835M options convert is very low. Usually small holders with little knowledge of how to trade them convert, unless there is minimal amount of time before expiry.
The cost of converting the options at this point or anytime over the next 12 months is far greater than on-selling them. It takes weeks to receive stock (at which point the SP could have fallen), you have to outlay the 3c, and those that exercise will loose 17 months worth of time value and any volatility built up in the option price .If the options were European, unlisted options, or if the stock paid a dividend this scenario would be a different story.
Many of the option holders in MEB are either sophisticated investors (who either know what they are doing or have access to someone that does) or heavily involved in the company, so there will be incentive for them to exercise around the expiry date to get the cash in, but this again assumes the SP is >3c late 2021.
Now there was also a question regarding the options themselves and what the returns might look like at different prices:
- My assumption is that @ 3c the options will be worth approx 1c (time and volatility value (IV)). At 3c the options become ATM and the delta is usually around .5 (meaning they increase 50% of what the underlying stock increases(not including IV)).
- At 4c the delta on IMO options has increased but the option has decreased in time value, so I assume at 4c the option price will be around 1.5 - 1.7c (delta started at .5 @ 3c and increases at every pip interval).
- At 5c the delta will significantly increase from this point and this is where the leverage really starts to kick in. Time value starts to work against us as the SP value rises significantly IV becomes less of a factor, however intrinsic value becomes significant. I expect we would see options prices around 2.4c - 2.5c at this point.
- At 10c there will be virtually no time value or IV, the option price would be 7c - 7.2c
So as you can see, the options provide good leverage initially, but if the stock price is able to really get away from the strike price the leverage becomes enormous.
**Please not these assumptions are based on previous experience and not using an options pricing model.**
Hope this helps
MEB Price at posting:
1.7¢ Sentiment: Buy Disclosure: Held
(20min delay)
