Some thoughts on the coming weeks...Owning CYP is a bit like...

Some thoughts on the coming weeks...

Owning CYP is a bit like owning a "Knock-In" Call Barrier Option*.

*A "Knock-In" option is complex derivative product where the owner has the right but not the obligation to buy a security at a given price (the Strike Price). However that option can only be exercised after a trigger condition has been met, usually the underlying security trading a specified higher price - the Barrier Level.

Anyone who has traded Barrier Options will warn you that as the market approaches the Barrier Level - an "event triggered sudden increase in value" - the difference between the market value of the triggered and untriggered option increases dramatically. The resulting uncertainty can drive the market crazy, as book runners rush to hedge Delta levels that hypothetically converge with infinity.

How is this helpful in understanding CYP?

I think that we can agree that Cynata is approaching a trigger event with the expiry of the Fuji option. (We are probably somewhere between A and B on my clumsy chart.) If Fuji exercises its option, the share price will (or should) jump to some were between $5-$10. If Fuji does not exercise the price will fall below $1. Unless there is a late variation in the conditions of the option, I can't see an outcome where the price settles between $1 and $5. So there are material consequences to getting CYP wrong over the coming weeks.

I think that the speculators and day traders instinctively understand this and I expect many to take their money and go to the sidelines. So the price is likely to drift down before 20 March.

I think that it is important to understand that this price movement will be a function of the risk profile, and not a reflection of the probability of the Fuji option being exercised.

Now I am not ashamed to say that I am a bit nervous. I expect that we will see a trading period soon, where for a short time it will be impossible to either enter or exist CYP in an orderly fashion. (The gaps in the charts will drive the technical analysts crazy.) So it is important to have a clear view on what you think the worst scenario is, and too decide whether you can accept the expected loss in that scenario. (My worst case scenario has me taking a total portfolio hit of about 1.2%. This probably means that I don't own enough CYP. )


Disclaimer: These are my personal thoughts, and I look forwards to some good natured ribbing if I am wrong. In any case, I encourage you to do your own research.)

All the best.
Timber