I see we've had an abundance of opposing points of view with the discussions of heads versus oppies...
It sort of looks like a UFC Championship bout between in the red corner, Scott, Timmy and Calc versus in the blue corner, Zippy.
we seem to be at the end of round 3 and I am a judge and I have the scores as follows:-
red corner (all those guys in the tag team) 27 points and blue corner (Zippy) 30 points so well done Zippy you've won every round so far and you're well on top...
and (hopefully) there's only 2 more rounds to go so unless Zippy gets absolutely hammered or knocked out, he'll be the winner.
To simplify (or stir) this whole argument on LOM vs LOMOB it makes sense to see things from
(a) the Traders point of view and
(b) the Investors point of view
as they are two totally different animals and two totally different arguments...
LOM vs LOMOB for Traders (in and out, in and out, in and out, short term, in and out etc)
Traders, may decide to trade just the heads or just the oppies (or possibly switch between the two depending on relative premium/discount at any point in time) just looking for short term gains.
As an example, if a Trader decides to trade just the oppies, he would not be too interested in the heads although he may glance at the price from time to time)
He would look on his oppies as a singular instrument (in a sense just like any other head or oppie) and because oppies are generally in a lower price category, each transaction would involve a greater volume and with the bigger price fluctuations generally associated with oppies he stands to gain (or lose) more money, that's his choice, just like some people play the $10 pokies and some play the $100 pokies, he is happy with the risk/reward of oppies.
He may not even attach any importance to leverage compared to the head, his instrument of choice happens to be an oppie and maybe nothing else matters, he's just trying to make pips from oppies.
The other consideration of course, is that he needs to be totally aware of the expiry date and act accordingly.
A more conservative Trader might be more comfortable with the heads and perhaps never even look at the oppies, he too focuses on what he's invested in but doesn't want to risk losing oppie pips.
So, regarding Traders, the above summary is specific to them and can now be isolated and ignored when looking at the pros and cons of LOM vs LOMOB relating to the longer term.
LOM vs LOMOB for Long Term Investors (Not Traders, Long Term Investors)
Some Long Term Investors will only invest in the heads as their instruments of choice for building a long term portfolio and never consider oppies for various reasons...
Some of them may not understand oppies, some may not appreciate the potential advantages of leverage, some may be worried that they could forget to exercise them before expiry and some may just understand that the price fluctuations can be far bigger and hence not be happy with the possible downside risk etc.
That's all fine but if long term investors take the trouble and time to really understand oppies, there are occasions when oppies are better than heads, it's very simple really, as follows:-
The heads and oppies are hovering around 39/40cents and 9.5 to 10 cents respectively, i.e. pretty close to par, so to keep it simple, let's work on 40cents/10cents.
Firstly, let's just define a true Long Term Investor...
It is someone planning to build a portfolio for the future, not planning to trade short term...
he may sometimes sell some shares e.g. if there is a sudden price increase and he wants to take some profits, or if he is stopped out or if he needs to liquidate some cash for another purpose, but selling was not his main objective, he wants to build a long term portfolio.
A long term investor does not generally say 'I'd like to buy 5,000 shares so what company can I afford to buy shares in?' He's is far more likely to say 'I would like to put some XYZ shares or some WOW shares or more likely some more LOM shares into my portfolio and even though I've only got $2,500 now, I will gradually accumulate/put to one side/withdraw my term deposit/inherit etc. another $7,500 to invest within the next two months, this means that based on the above example, he will eventually be able to buy 25,000 LOM, which is what he eventually decides to acquire as additional shares in his long term portfolio.
So, the question is, even though he's never invested in oppies before, should he at least consider them?
OF COURSE HE SHOULD!!!
Using the above figures as an example, what if, as we expect, the price goes up substantially, if he waits for 3 months, he may only be able to buy 10,000 LOM, so would it be a mistake to wait?
OF COURSE IT WOULD!!!
Right now, he could buy 25,000 oppies, for cash, today, with his $2,500 and within the next 2 months he will be able to exercise them.
It's a no brainer... BUY THE OPPIES, that way you'll end up with 25,000 LOM instead of 10,000.
It's clear, with a price rise, like the many that we're expecting, he's a lot better off buying oppies today rather than waiting, it locks in the 40 cent price, just like a lay by.
Let's look at another example, what if there's another investor and he's already saved up his $10,000 and he also wants to add 25,000 LOM to his portfolio, should he just go out and buy them all today?
Not necessarily, perhaps he should also consider just buying the 25,000 oppies today and let the other $7,500 earn extra money for him over the next two months, lots of choices. Then just like the investor above, he can convert is options just before expiry.
He's certainly no worse off than if he had bought the heads, in fact he's better off, remember that $7,500 he invested for a couple of months, that earnt him some extra.
Did I hear someone ask "But what if the price goes down and it's still lower in two months"
Good question and here's the good answer...
So, let's say the price fell to 35 cents just before the options expire, he can still exercise his options and then he's in the same position as if he'd bought the LOMs for 40 cents, he would own 25,000 LOM and he would have paid $10,000 and the shares are worth the same under both scenarios. So in comparison, there is a little upside, but there's no downside. They've both made a short term loss on paper but hopefully the price will recover and LOM becomes a very important part of the long term portfolio.
But did I hear someone shout out "What if the shares fell to 20 cents just before the oppies expired?"
I would then do my John McEnroe impersonation and shout back "YOU CAN NOT BE SERIOUS!!!"
and then he'd probably say "No I'm not, but just in case, what then?"
Well, the guy that bought the options would be $2,500 out of pocket because he would let the oppies lapse and pay $5,000 for the shares BUT, the guy that bought the heads would be $5,000 out of pocket!!!
So there you go, there can be many examples of Oppies being a great choice.
A recent example of mine, earlier this week or late last week, I sold some heads for 45.5 I think it was and bought oppies for 10 cents and banked more money than I need to convert them in a couple of months)
Obviously some people are somewhere in between pure trader and pure investor, in fact I suspect that most of us are but I think the above summary helps to show that Oppies can sometimes be the best oppie.
Please do your own research, none of the above is intended as investment advice, just supporting Zippy's point of view.
Sorry guys, I can't scroll back to proof read so I hope there aren't too many errors.
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