Looking at the offer price for the KRC shares and options at the...

Looking at the offer price for the KRC shares and options at the close of trade today left me wondering about the relative merits of selling my KRC shares and buying KRCOB options or vice versa. The offer price at today’s close for the shares and options was 11.5 cents and and 5.1 cents respectively. I tried to work out just how high KRC shares would have to go, before July 31^st 2020, to make it more profitable to sell my KRC shares and turn the cash into options. A more advanced mathematician will be able to give you a more exact answer but, by my calculations, the answer is “almost 22 cents”.

My assumptions are based on my own situation: a KRC stock holder holding a portfolio of KRC: KRCOB at 3:1. If at the final date for exercising the KRCOB options the KRC shares are trading at 21 cents or under, I would be better off selling the KRCOB options at 5.1 cents and investing the proceeds into KRC shares. If KRC shares are trading at 22 cents or over at that time (ie a few days before 31 July, 2020) it will be good business to sell the shares and buy the options.

So what to do? Looking at all the many posts here on HC that suggest  KRC is currently well undervalued a strong argument can be mounted that KRC will be well above 22 cents in 2 years time. If we do see KRC at well over 22 cents at July 31, 2020 the current 5.1 cent offer for KRCOB (with current fundamental value of -$.05) will look cheap. On the other hand, for KRC to reach 23 cents by then will require a 100% increase  on today’s closing asking price. My own conclusion is that I am definitely not going to sell my options. Perhaps reproving Daniel Kahneman correct I feel nervous (irrationally?) about swapping my KRC stock for out of the money options at close to 50% of the share price.

As I post this comment I can see a lot of discussion about a 30 cent KRC share price. By my calculations if KRC  goes over 30 cents by July 31st, 2020 then selling my  shares and buying the options would leave me more 35% better off. *

If KRC shares go over 30 cents before July 31st, 2019 leaving the KRCOB options 18 cents "in the money" with 12 months of time value on top of that, those of us that didn't convert to options will wonder what we were thinking. Perhaps that's why the options seem expensive and the shares seem cheap?

* These are my own calculations and I am not a spreadsheet expert. Anybody reading this post should do their own calculations.