Friday's options exercise no threat to share price - the opposite given expectations?

For those who want to ignore the complicated stuff, allyou need to know is the Directors and employees who received 3,370,525 shares asof Friday from the exercise of 10,800,000 May 2021 options with an exerciseprice of $0.395, did so with no cash outlay via the ‘cashless exercise’facility offered by the company. That is,the employees had to outlay no cash for the shares and effectively got themfree and all of the options have been exercised – they have absolutely no urgencyto sell this smaller net amount of shares in the market because of this facility.

It’s complicated, but the larger balance of the options was essentially foregone to pay for the shares awarded, hence the employees get the shares for free – no personal financial outlay involved. With the exception of Mike Callahan, no Director has really ever sold any significant OCC shares to date and there will be absolutely no urgency in the selling of these shares as there would be for normal employee exercises, so do not expect any significant share price selldown on these options (that many of you, like myself, will have naturally been concerned by).

Cashless exercise facilities:

Like many ASX companies, OCC offers a cashless exercise facility for employee award share options. These have in the past initially extended to basically lending cash to pay for the exercise of options. If I am a Director/employee with 1,000,000 call options at an exercise price of $0.395, traditionally, I still need to outlay $395,000 (1,000,000 x $0.395: a call giving you the right, but not the obligation to buy the stock at the exercise price) to exercise the options that are ‘in the money’ – that is they have intrinsic value against the $0.535 Friday close.

Naturally, presuming the employee is sane and risk averse, the immediate action would normally be to sell down the stock, off-loading at least 740,000 shares at $0.535 just to pay back the loan (or 745,000 shares at $0.53 or 750,000 shares at $0.525….you get the picture…). If you have 10.8 million shares in the hands of employees hitting the market at the same time trying to do the same thing, naturally the market should be expected to fall quickly under such selling pressure that effectively increases if the market does not initially buy – we probably saw a dip Monday on expectations of this, that were alas ignorant of the cashless exercise facility (companies, ASIC and the ASX do a very poor job of explaining/disclosing this stuff).

Cashless exercise facilities have evolved and now what companies do is essentially replicate the market. Were there an actual market for OCC options, employees rather than assuming the costs, complications and risks of exercises, could simply sell the options back to the market for perceived value. This is essentially what happened Friday but with one big difference – the company is the buyer. Many of you will be familiar with options ‘delta’, amongst whose definitions is the probability of the option having intrinsic value at expiry (there is the possibility of course that the call options have no value at expiry should the stock drop sufficiently). Essentially what the company/employees have done have sold back a large proportion of the potential 10.8 million call options on a delta (probability) value basis to the company and in return received a ‘free’ call exercise on the balance.

For our purposes, whilst this might seem a bit of a wrought (it is very common practice and ignorance of it a sorry reflection of the reality of investment), it is actually a huge blessing for OCC shareholders in disguise. Going back to our example above, were this facility not in place, I would have personally likely temporarily sold before May (or any early exercise), knowing 11 million shares were about to hit the market against over $4 million of borrowed collateral that would have had to be paid back by share sales, thus temporarily driving the share price down in dramatic short-term fashion.

Rather than 11 billion shares hitting the market in May with employee shareholders having no choice to at least sell a huge proportion to the market, we instead have 3.37 million shares effectively having been given to employees for no financial outlay their end (so they have absolutely no financial need to sell). It’s also less dilutive for us in the long run. Win, win.

Happy to discuss this in more detail and explainthe aspects of options like delta with more technical insight for those whowish – its complicated unless you really grasp basic options theory. Its hardunderstanding these generous awards schedules how this is a win for us, buthopefully the above explanation clarifies why. I personally am hugely relieved from a personal holding perspective