options, page-4

An option gives you the right to ‘exercise’ your option (convert to a fully paid share) prior to the nominated expiry date. You are under no ‘obligation’ to exercise your option.

In a nut shell, in this ERJ instance, you get given one ‘free’ option for every 10 fully paid shares you have at the time they nominate. You have the ‘right’ to convert that option into a fully paid share by paying 20c. That right is available until the exercising deadline (2016).

For example………….

If you hold 20,000 shares at the nominated time, you will get 2,000 options for FREE.
You can pay 20c per option, (2,000 x 0.20c) = $400. You can exercise any number you want before the exercise deadline.

If sometime during the exercise period (before 2016), the share price reaches say $2.00, you can exercise for the same $400 and get a net profit, through your conversion of shares, of 2,000 x .20 = $400 (cost) Profit = $2.00 - .20 $1.80 x 2,000 = $3,600 (for free!) – Do your own sums!

By the same token, if the share price does not reach 20c, there is no point in exercising you option. They would expire unconverted and you would loose them - I don't think that will happen here!

During the 'exercisable period' I am sure the Options will also be openly traded which will bring into affect another interesting dynamic. Be on the look-out for perhaps an option listing ERJO.

I can’t wait!......................... bring it on!

The following from Wikipedia............

"In finance, an option is a contract between a buyer and a seller that gives the buyer the right, but not the obligation, to buy or to sell a particular asset (the underlying asset) on or before the option's expiration time, at an agreed price, the strike price. In return for granting the option, the seller collects a payment (the premium) from the buyer. A call option gives the buyer the right to buy the underlying asset and a put option gives the buyer of the option the right to sell the underlying asset. If the buyer chooses to exercise this right, the seller is obliged to sell or buy the asset at the agreed price.[1][2] The buyer may choose not to exercise the right and let it expire. The underlying asset can be a piece of property, a security (stock or bond), or a derivative instrument, such as a futures contract.

The theoretical value of an option is evaluated according to several models. These models, which are developed by quantitative analysts, attempt to predict how the value of an option changes in response to changing conditions. Hence, the risks associated with granting, owning, or trading options may be quantified and managed with a greater degree of precision, perhaps, than with some other investments. Exchange-traded options form an important class of options which have standardized contract features and trade on public exchanges, facilitating trading among independent parties. Over-the-counter options are traded between private parties, often well-capitalized institutions that have negotiated separate trading and clearing arrangements with each other.

Another important class of options, particularly in the U.S., are employee stock options, which are awarded by a company to their employees as a form of incentive compensation. Other types of options exist in many financial contracts, for example real estate options are often used to assemble large parcels of land, and prepayment options are usually included in mortgage loans. However, many of the valuation and risk management principles apply across all financial options."