As part of the recent capital raising NKP issued around 20 million on market options under the code NKPO. Since this time there has been alot of discussion about where fair value lies for these options and if us traders/investors are better to buy the options or the heads. Alot of the long termers on here will have their own ways to work out what they should do but I thought that I would post my personal opinions/calculations so that some of the newer investors could get a better idea of how they both work.
Realistically for me there is only one question to ask and that is 'What price do I believe NKP will get to by the time these options expire in June 2011?'. Now everone is going to answer that question differently and that is where your final decision should come from! To get the most out of this you should have a that figure in your head before you read any further.
Based on todays closing prices of 0.10 (NKPO) and 0.30 (NKP) I will show you how I personally find fair value for the options.
Using $10,000 as an investment example firstly I work out how many options or heads I can purchase with that money.
The next step is to take the figure that you have in your head from earlier (NKP price target) and multiply it by the amount of options or heads that we have. For this we will use a NKP price target of $1.75 because I believe it should be that and more within 2 years but thats just my view. You should insert your own price target in this step.
That gives us the value of either the options or the heads at expiry time. Keep in mind that to exercise the options you will have an extra $35,000 because of the $0.35 exercise price or alternately you could sell them on market just before expiry. From this all we need to do is subtract the total cash outlay to get you net profit.
Options = $175,000 - $10,000 original investment - $35000 exercise = net profit of $130,000 or %1300
Heads = $58,332 - $10,000 original investment = net profit of $48332 or %483.33
So for the same original investment of $10,000 using todays closing prices the options have outperformed the shares by $81,668 or %816 over the 2 years.
Obviously as the price moves higher or lower it will change how much better or worse the options will perform against the heads so I will provide the following price targets and their profit outcomes from $10,000 invested in both classes at todays closing prices.
2yr $0.50 price target Options - $5000 or %50 Heads - $6667 or %66.6
2yr $1.00 price target Options - $55,000 or %550 Heads - $23,333 or %233
2yr $1.50 price target Options - $105,000 or %1050 Heads - $40,000 or %400
2yr $2.00 price target Options - $155,000 or %1550 Heads - $56,667 or %566
2yr $2.50 price target Options - $205,000 or %2050 Heads - $73,333 or %733
2yr $3.00 price target Options - $255,000 or %2550 Heads - $90,000 or %900
2ry $3.50 price target Options - $343,889 or %3438 Heads - $110,690 or %1106
So by looking at the above price targets you can see that as long as the NKP share price finishes above $0.525 at the 2 year expiry the options outperform the heads at the current prices. Now from using this information and your price target you can hopefully decide what you personally deem to be fair value for the options. I personally think that they are a great buy at $.10 but that is just my opinion using my price target! The other thing to keep in mind is that there are only around 20 million options on the market and as of close today by my reckoning around 6 million of those options have been drip fed to the market by whomever they were issued to. I suppose the question is are they going to keep selling all 20 million or only a set amount and keep the rest? Just another thing to keep in mind as there may be a lack of options for sale at current prices shortly.
Please excuse any errors that may be in this document and please check the calculations yourself as I have just written this off the top of my head and it is all starting to be a bit of a blur.
This is not intended to be financial advice only a personal opinion so please do your own research and make your own decicions when investing.
NKP Price at posting:
30.0¢ Sentiment: LT Buy Disclosure: Held
