options

Just a quick primer on options for those that might not be aware of all the intricacies so that nobody gets caught out.

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CFROB options give you the right to exercise them and convert into full shares at 1c. What this means is that if you opt to exercise them, you will need to pay 1c for each option you wish to convert and those options then turn into full CFR shares.

For example: 1m CFROB + $10,000 = 1m CFR

Conversion involves getting a form from the company to fill out and send back, and typically takes a couple of weeks to complete after which you will be the proud owner of CFR stock.

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Why are the CFROB trading at their current price?

Sensibly speaking, 0.2c + 1c = 1.2c, so by buying the options, and then paying to exercise them, you'd make a loss right now... why is anyone buying them at all?!

The reason here is that those that buy them are of the opinion the SP will move past 1c in the near future. And once it does, the value of the CFROB will percentage-wise increase much more than CFR.

For example, right now, $8000 can buy either:
- 1m CFR (at 0.008 currently)
- 4m CFROB (at 0.002 currently)

If the price of CFR goes to 1.5c after any announcements in the near future, what does this mean?
- 1m CFR at 1.5c is worth: $15000
- 4m CFROB at 0.5c is worth: $20000

And if it moves further to 2c for example, the difference gets even more dramatic:
- 1m CFR at 2c is worth: $20000
- 4m CFROB at 1c is worth: $40000

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Why isn't everybody doing this then!?

Well, the first reason is that if you are holding CFROB options at the deadline in July they instantly become worthless... unexercised options have *NO VALUE*, so there is an increased risk attached to the options.

Also, due to the conversion time of a couple of weeks, you may exercise your options and during the delay the SP drops again and you end up with shares that are worth less than what you paid for them.

As a result of those risks, options tend to trade a little further away from the SP than the exercise price (so rather than trailing 1c, it'll trail 1.1c or 1.2c)

Right now though, the gap is much smaller than 1c ... this is because the potential rewards of investing in CFROB if the SP does go up significantly is much higher than CFR itself. You get more bang for your buck.


As always, do your own research, and be aware that CFROB *is* inherently more risky than CFR. But with that risk also comes more potential reward. (And yes, I've bought options myself to go alongside my CFR for this exact reason)