NewTolts Options Post, page-2

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First let's understand that Options are not like normal Shares (referred to as Heads), Options have an expiry date (heads do not), Options do not have voting rights (Heads do), and owning Options does not entitle you to Share Purchase Plans for Shareholders (sometimes done as a % of what you own, or as a specific amount available for purchase).

So Expiry Date of these Options is March 2018.
That means that in March 2018 you either;
* Pay the 2c to exercise the Option and you receive a Head.
* Sell it to someone else for them to do that
* Let it expire worthless and you get nothing.

Between Now and the Time they expire and the value associated with that is referred to as TIME VALUE.

Time Value is the value given to an option based on how long it has left, and how likely someone thinks that it will be worth something. The further away from it's Expiry date, the Higher the TimeValue.

There are other factors that affect the Time Value price such as Speculation, % Gain, Liquidity and so forth... but let's just focus on How Far Away From Expiry Date for now.

If Heads (the normal Shares) were to hit 86 cents, it would depend on WHEN it hits 86c, as that would determine the Time Value of the Options.


At the moment, the Options are trading at 0.5c, and their exercise price is 2c. But the current Head Price is 1.3c.
What this means, is that you are paying 0.5c for the option(or ability to buy) to pay 2c for a Head. So if you were to exercise that option after purchasing it... the total cost you paid for 1 Share = 2.5c

So you compare that to the current Shareprice of 1.3c
2.5c - 1.3c = 1.2c <-- this is the current Time Value of the options.

To do this calculation in reverse to work out the Price of Options;
Shareprice - Exercise Price + Time Value
1.3c (shareprice) - 2c (exercise price) + 1.2c (time value) = 0.5c <--- this is the current price of Options

So we can use the same method to work out what the future Option Price might be.

Now if the price of Heads was 2c, the price of the Options without any Time Value should technically be 0c... except that you do have to add the Time Value...
So let's assume that every year that passes, the Time Value decreases by 0.5c
So come March 2016... the Time Value might be say 1.1c
March 2017... the Time Value might be 0.6c
and March 2018... the Time Value might be 0.1c


So... if the Share Price Wonderfully and Miraculously (yet at the moment Unlikely) but did raise to 86c ... then the Price of Options could be calculated as;
2016 = 86c (share price) - 2c (exercise price) + 1.1c (time value) = 85.1c
2017 = 86c (share price) - 2c (exercise price) + 0.6c (time value) = 84.6c
2018 = 86c (share price) - 2c (exercise price) + 0.1c (time value) = 84.1c




So that is taking into account ONLY the Time Value aspect of Options.
However as I mentioned, there are many other factors that may influence it... but they require a bit more reseach and understanding.
To give you an idea of what I mean, here is a brief example of another aspect that affects price.


Once the price of Heads get's so far above the price of Options... the % price gap between the Options and the Heads gets much smaller, and thus the potential gain starts to reduce.
So if you were to consider the benefits that Heads provide over the Options (such as voting rights, dividends [if any], Share Purchase Plans... and so forth)... you might decide that the Heads are a better/safer investment t make.
If many people decide this... then the Time Value would reduce significantly, regardless of how long was left till expiry.

If you are unsure what I mean...
At the moment Options are very cheap when compared to Heads (0.5c vs 1.3c), and so you can buy more than Double the number of Options compared to Heads. This means that you have greater exposure to any price movement (both up and down)... but also greater risk.

Now if the price of Heads was 86c... and the price of Options was 85c... why would you bother to buy the Options? (If I spent $10k, I would get 11,627 Heads or 11,764 Options... But the Options would have an Expiry date and also dont have the full rights that Heads do).

So at that high price, with so little to gain compared to the risk, why buy the Options...?


Anyways, hopefully this gives a bit of an understanding on how to calculate potential Price.
You should use it to calculate not just how much you might gain... but also how much you might lose.


None of the above is Trading Advice, and if you do no understand Options, then best to talk to a Broker or Financial Adviser.

Good Luck to all!