to the ctp gurus, page-2

bermuda1,

I'm not a guru but I'll give you my thoughts and experiences and let you make up your own mind.

There is certainly a relationship between the price of the FPO and the options but it is rarely as simple as a percentage (or even a number of cents) below the FPO price.

The variables are the exercise price (16c for CTPO), the length of time to expiry (3 years and 9 months) and the price of the FPO. There are also elements of liquidity and perception of leverage but these are much harder to account for.

While ever the time to expiry is significant in relation to the known amount of upcoming activity, the options will trade at a premium to exercise price. This is certainly the case whenever the FPO price is below the exercise price.

The reality is that as the FPOs approach exercise price, the time decay (length of time to expiry) and liquidity become less improtant (although still factors) and the options tend to move towards trading at the level of FPO price minus exercise price. The closer you are to expiry date the more true this will be.

Using a scenario of CTP trading at 50c, then on the day before options expiry, the CTPO will be trading at about 34c. However, if CTP is trading at 50c with 12 months to go before expiry, then CTPO will be trading at a premium due to the time available before expiry - possibly as much as 5c in this particular scenario and therefore would be selling at about 39c.

Looking at the situation right now with CTP at 7c and CTPO at 3.4c, they are actually trading at a premium of 12.4c to the value of the FPO (true value is 7c minus 16c exercise price which equals minus 9c and trading at 3.4c which is 12.4c above true value).

That will reduce as the price of the FPO approaches and then passes the exercise price and at that time will more likely be somewhere around an 8c premium.

Looking at the price spike we had last year, the FPO got to about 23.5c in Oct and the CTPO topped out at 12c. If they were concurrent prices (and I'm too lazy to check) it means that the premium reduced to just 4.5c at that time. This rough analysis doesn't take any account of volatility, and also ignores time deacy which is probably insignificant given the long time still remaining until expiry.

In short, the current premium will definitely reduce as the FPO price increases and will more likely settle at a point somewhere between 3-7c above true value and then slowly reduce as we approach the exercise expiry date. There may well be days where the premium is exagerated (up or down) due to volatility but it certainly won't remain stable at the current level of 12.4c.

I could keep going but I've probably bored everyone to sleep by now.

Cheers

Badfish