Your BWN example explained. Sorry for posting this on MMR thread, but it's just an answer to the question asked:
Options BWNO have an exercise price of 20cents. BWNO have an expiry date of 27th November 2009. BWNO are trading at 0.4cents.
On or before 27th November you may send a cheque to the share registry for 20 cents per option and you will be credited with a BWN share in return.
Total price = 20.4 cents per BWN share.
The Shares Currently BWN is trading at 14 cents.
Why pay 20.4cents, when you can pay 14? People are buying the options because they are speculating that the shares will be above 20.4cents before 27th November. If the shares were at 30cents, then they would make a 9.6 cent profit for a 0.4 cent outlay.
However, if the shares are trading much below 20cents on 27th November, it is likely that anyone holding the options would not bother to exercise them, and they would expire worthless, and they would lose their entire outlay in BWNO.
However, shareholders would still own their BWN shares.
With options, you have leverage. With this comes both increased losses and profits.
For the record, I own MMR and BUY.
Joel
MMR Price at posting:
26.4¢ Sentiment: LT Buy Disclosure: Held
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