Options can be a very complex and strange beast...
...however, more often than not, the market seems to get it right!
Generally speaking however, when it comes to options...the greater the leverage, the greater the premium.
LEGO is a good example of this...
Since the current run on the OFP's began, LEGO has carried a substantial premium...initially about 6c-7c and more recently in the range of 3c-4c.
From the above example, it is obvious that as the price of the OFP's has increased, the premium on the options has decreased...this is because the higher the price of the options, the less leverage you get from buying them, relative to the FPO's.
As I said earlier, options are somewhat complex and the above example is perhaps a simplification of how they might perform.
When buying options you also have to consider; exercise price; exercise date; current price; current premium; number on issue; market spread; market sentiment; perceived value; true value; leverage; liquidity; volatility; risk/reward ratios; current optionholders; special conditions attached; are in the money?; etc, etc, etc...
Two examples, of the kind of varying premiums found in options, are TAWOA and COE...
TAWOA seems happy to hold onto a premium in the range of 15c-30c...regardless of any short term market sentiment and have pretty much done so since they were trading in the 20's...even in the face of the reducing leverage relative to the price of the OFP's. (The main factors effecting these are current optionholders, liquidity, longevity, risk/reward ratios and current business activities)
COEO on the other hand, went from trading at a premium, to trading at a discount for most of their later life. Before the "Worrior" strike, COE was trading in the 12-16c range and the COEO's were trading in the 2-3c range, giving a premium of about 8c...yet, when COE reached the high 20's the options pretty much began trading at a discount...or in other words, at a negative premium. (The main factors effecting their performance were the limited time to expiry and lack of upcomming business activities)
The most obvious thing driving both of these examples is "market sentiment"...which I feel is probably the single most important factor influencing the price of any options.
Which brings me back to LEG...
Given that we still don't have a particularly clear picture of their current activities or future earnings potential, it is obvious that the main driver behind LEG's shareprice has been "market sentiment"...and the level of this sentiment has been clearly reflected in the size of the premium on the options.
Therefore, by extension, this premium should give us a bit of a clue as to when LEG has reached the top of the current rally...it will more than likely be when the options cease to trade at a premium and perhaps even start trading at a negative premium...a clear indication of a shift in sentiment.
This will be the time to sell...but judging by some of the previous posts, that is probably when some of you would start buying them...LOL
Cheers!
LEG Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
