oppies vs heads, page-8

I first got into SSN through an "oppies vs. heads" strategy so it's a subject I spent a bit of time wondering (have since become a full Samson convert though).

The leverage argument is good, as long as we remember that (1) with the leverage (ie. SSNO) comes higher risk/volatility, and (2) you can theoratically recreate the leverage on any stock by margin lending (or in the case of speccies, taking out a 2nd mortgage on your house and buy using that leverage).

So with that in mind, if we assume we have exactly 7 cents which equals to the price of SSN, we can (a) buy 1 SSN; or (b) by 1 SSNO and put the remainder in the bank (call this "alpha"). Assuming the bank deposit is risk free, the risk we're taking on in both (a) and (b) are essentially equal. Now fast forward to Dec 2012, we know that 1 SSNO should be exactly 1.5c less than 1 SSN (in a "perfect" market), as that's the conversion price.

Hence that means by Dec 2012:
(a) = (b)
1 SSN = 1 SSNO + (alpha x interest in a bank for 2.5 yrs)
1 SSNO + 1.5c = 1 SSNO + (alpha x interest in a bank for 2.5 yrs)
1.5c = (alpha x interest in a bank for 2.5 yrs)

So, if we say interest in a bank is say 6%:
alpha^2.5 = 1.5
alpha = 1.18c --> ie. this should be the difference between SSN and SSNO at the moment, and should move up towards 1.5 as you get closer to Dec 2012.

Of course, there are other reasons why this relationship won't hold all the time (tax, liquidity, availability of credit, gapping down, expectation of future share price movements etc.), but it shouldn't be too far from it or else it could be an arb opportunity.