I have an online trading account and I can see that it is easy to buy options. Basically the same as buying shares.
I can also see that you can sell them the same way (as you would shares).
My first question is: how does the converting the option to a share part work - exercising the option to buy at a certain price. I mean is there a method for doing that within online trading or is there some other method required? I'm with NABtrade if that makes any difference.
Second question is: When I eventually exercise the option to buy the underlying share (because it has a higher price than the exercise price), if I sell the new shares I gained straight away, does that attract full CGT? Or does the amount of time I've held the options have any bearing?
Reason I'm asking is because I did some calcs based on an option I was interested in:
MOZO which is .019 The exercise price is 2c (good for a couple of years I think) The MOZ share price currently is .037.
So that means the option is really costing .039. I've played with a spreadsheet with various share prices and the return on the options doubles the return on buying the share. But when you factor in tax it pretty much wipes out most of the advantage.
For example:
I buy $2,000 worth of MOZO @.019 = 105,263 options.
Exercise price @2c will be $2,105.26
Total = $4105
IF the share price went to 60c (wild example) and I exercised my options I'd have 105,263 MOZ worth $63,217 or a $59,112 profit.
But if I sell those share within a year, I would have to pay (roughly) 50% tax (?).
So the profit comes back down to $29,556
If I bought $2000 worth of plain old shares at .037 I'd have 54,054 shares.
IF they went to 60c (which would be longer than 12 months say) they'd be worth $32,432.
CGT would be half as much so 25% ($8,108) which means profit would be $24,324.
So it's $5200 difference between buying options over shares in this example.
Is that right? Or am I getting something wrong?
Any help with this would be MUCH appreciated. Just want to understand them better.
