re: For those who like to short NCP ... andalisa Hi anadalisa...

re: For those who like to short NCP ... andalisa Hi anadalisa ... an interesting situation re: NCP and NCPWMY ...

Firstly, your example of NCP at $8.55 (6/08/02) does crunch NCPWMY as $0.693 FAIR VALUE so the quote is as according to BSOPM.

NCPWMY is very deep (nearly 7 clicks-ITM) in-the-money and strange things happen at both extremes with respect to BSOPM modelling ...

I crunched some numbers and it is technically possible to push these a little further and arrive at a figure less than intrinsic even ... suggesting a quick exercise would yield an instant arbitrage profit.

The Bid/Ask's we see by MM's are computer modelling of BSOPM which make these technically possible (only) and while it is true that NCPWMY price will move to show time component within FAIR VALUE as the underlying price gets closer to the $12.00 Strike ... there is one problem ...

You have to BUY now and hold to get it ... but of course it only occurs if the underlying moves against you ... meaning your Warrant must decrease in value ...

Further, derivatives traders do so as the lure is leverage ...

At these extreme levels (ITM/OTM) leverage is heavily reduced ...

An example for today:

If NCP was SHORTED and went from $8.75 to $7.75 you would have about 11.4%

NCPWMY at yesterday's $0.69 would grow to $0.84 or 21.7% or only 1.9 times the gain from simply trading the underlying.

More likely, NCP will gap at open meaning you would have needed to BUY yesterday ($0.69) to get set.

If NCP hits say $9.10 your NCPWMY are worth $0.596 or a loss of 13.6% (and just on intrinsic alone ... if you were closer to the money you would also be paying time premium)

Your NCP SHORT however, would have lost only 4% ...

The RISK FACTOR above shows the other side of the equation and particularly why we should trade closer to the Strike Price.

There are seldom bargains in the derivatives market ... RISK and REWARD rule ...

Cheers ...


This is only my view ... read the red stuff.